ANOVA for diffusions and Itō processes
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ANOVAstable convergencediscrete samplinggoodness of fitoption hedgingstatistical uncertaintycontinuous semimartingaleparametric and nonparametric estimationsmall interval asymptotics
Asymptotic properties of nonparametric inference (62G20) Time series, auto-correlation, regression, etc. in statistics (GARCH) (62M10) Applications of statistics to economics (62P20) Non-Markovian processes: estimation (62M09) Economic time series analysis (91B84) Statistical methods; risk measures (91G70) Martingales with discrete parameter (60G42) Martingales with continuous parameter (60G44)
Abstract: It^{o} processes are the most common form of continuous semimartingales, and include diffusion processes. This paper is concerned with the nonparametric regression relationship between two such It^{o} processes. We are interested in the quadratic variation (integrated volatility) of the residual in this regression, over a unit of time (such as a day). A main conceptual finding is that this quadratic variation can be estimated almost as if the residual process were observed, the difference being that there is also a bias which is of the same asymptotic order as the mixed normal error term. The proposed methodology, ``ANOVA for diffusions and It^{o} processes, can be used to measure the statistical quality of a parametric model and, nonparametrically, the appropriateness of a one-regressor model in general. On the other hand, it also helps quantify and characterize the trading (hedging) error in the case of financial applications.
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