Inference for Observations of Integrated Diffusion Processes

Abstract

Abstract. Estimation of parameters in diffusion models is investigated when the observations are integrals over intervals of the process with respect to some weight function. This type of observations can, for example, be obtained when the process is observed after passage through an electronic filter. Another example is provided by the ice‐core data on oxygen isotopes used to investigate paleo‐temperatures. Finally, such data play a role in connection with the stochastic volatility models of finance. The integrated process is not a Markov process. Therefore, prediction‐based estimating functions are applied to estimate parameters in the underlying diffusion model. The estimators are shown to be consistent and asymptotically normal. The theory developed in the paper also applies to integrals of processes other than diffusions. The method is applied to inference based on integrated data from Ornstein–Uhlenbeck processes and from the Cox–Ingersoll–Ross model, for both of which an explicit optimal estimating function is found.