Telling from discrete data whether the underlying continuous-time model is a diffusion

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Abstract

Can discretely sampled financial data help us decide which continuous-time models are sensible? Diffusion processes are characterized by the continuity of their sample paths. This cannot be verified from the discrete sample path: Even if the underlying path were continuous, data sampled at discrete times will always appear as a succession of jumps. Instead, I rely on the transition density to determine whether the discontinuities observed are the result of the discreteness of sampling, or rather evidence of genuine jump dynamics for the underlying continuous-time process. I then focus on the implications of this approach for option pricing models.

Original languageEnglish (US)
Pages (from-to)2075-2112
Number of pages38
JournalJournal of Finance
Volume57
Issue number5
DOIs
StatePublished - Oct 2002

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

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