AcademicsWorking Papers

Some Recent Developments in Nonparametric Finance
Zongwu Cai, Yongmiao Hong
#002011 20131014 (published)
This paper gives a selective review on some recent developments of nonparametric methods in both continuous and discrete time finance, particularly in the areas of nonparametric estimation and testing of diffusion processes, nonparametric testing of parametric diffusion models, nonparametric pricing of derivatives, nonparametric estimation and hypothesis testing for nonlinear pricing kernel, and nonparametric predictability of asset returns. For each financial context, the paper discusses the suitable statistical concepts, models, and modeling procedures, as well as some of their applications to financial data. Their relative strengths and weaknesses are discussed. Much theoretical and empirical research is needed in this area, and more importantly, the paper points to several aspects that deserve further investigation
JEL-Codes:
Keywords: Continuous time model; derivative pricing; jump process; kernel smoothing; nonparametric test; nonparametric pricing kernel; non-stationarity; options; predictability;stochastic discount factor; time-dependent model.


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