The analysis of diffusion processes in financial models is crucially dependent on the form of the drift and diffusion coefficient functions. A methodology is proposed for estimating and testing coefficient functions for ergodic diffusions that are not directly observable. It is based on...

The paper derives a parsimonious model for the long-term dynamics of a well-diversified stock index, the S&P500. The index is modeled as growth optimal portfolio. Its normalized value evolves, in some market time, as a square root process. The derivative of market time is a linear function of...