Approximate Transition Density Estimation of the Stochastic Cusp Model

Result code in IS VaVaI
<a href="https://www.isvavai.cz/riv?ss=detail&h=RIV%2F00216208%3A11320%2F16%3A10329834" target="_blank" >RIV/00216208:11320/16:10329834 - isvavai.cz</a>
Alternative codes found
RIV/67985556:_____/16:00507383
Result on the web
<a href="http://mme2016.tul.cz/conferenceproceedings/mme2016_conference_proceedings.pdf" target="_blank" >http://mme2016.tul.cz/conferenceproceedings/mme2016_conference_proceedings.pdf</a>
DOI - Digital Object Identifier
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Result language
angličtina
Original language name
Approximate Transition Density Estimation of the Stochastic Cusp Model
Original language description
Stochastic cusp model is defined by stochastic differential equation with cubic drift. Its stationary density allows for skewness, different tail shapes and bimodality. There are two stable equilibria in bimodality case and movement from one equilibrium to another is interpreted as a crash. Qualitative properties of the cusp model were employed to model crashes on financial markets, however, practical applications of the model employed the stationary distribution, which does not take into account the serial dependence between observations. Because closed-form solution of the transition density is not known, one has to use approximate technique to estimate transition density. This paper extends approximate maximum likelihood method, which relies on the closed-form expansion of the transition density, to incorporate time-varying parameters of the drift function to be driven by market fundamentals. A measure to predict endogenous crashes of the model is proposed using transition density estimates. Empirical example estimates Iceland Krona depreciation with respect to the British Pound in the year 2001 using differential of interbank interest rates as a market fundamental.
Czech name
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Czech description
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Project
<a href="/en/project/GBP402%2F12%2FG097" target="_blank" >GBP402/12/G097: DYME-Dynamic Models in Economics</a><br>
Continuities
P - Projekt vyzkumu a vyvoje financovany z verejnych zdroju (s odkazem do CEP)

Publication year
2016
Confidentiality
S - Úplné a pravdivé údaje o projektu nepodléhají ochraně podle zvláštních právních předpisů

Article name in the collection
34TH INTERNATIONAL CONFERENCE MATHEMATICAL METHODS IN ECONOMICS (MME 2016)
ISBN
978-80-7494-296-9
ISSN
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e-ISSN
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Number of pages
6
Pages from-to
892-897
Publisher name
TECHNICAL UNIVERSITY LIBEREC
Place of publication
LIBEREC
Event location
Liberec
Event date
Sep 6, 2016
Type of event by nationality
WRD - Celosvětová akce
UT code for WoS article
000385239500153

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