We extend the maximum likelihood estimation method of Ait-Sahalia (2002) for time-homogeneous diffusions to time-inhomogeneous ones. We derive a closed-form approximation of the likelihood function for discretely sampled time-inhomogeneous diffusions, and prove that this approximation converges...

We extend the maximum likelihood estimation method of Ait-Sahalia (2002) for time-homogeneous diffusions to time-inhomogeneous ones. We derive a closed-form approximation of the likelihood function for discretely sampled time-inhomogeneous diffusions, and prove that this approximation converges...

We develop a specification test and a sequence of model selection procedures for non-nested, overlapping, and nested models based on the second Hansen-Jagannathan distance, which requires a good asset pricing model to not only have small pricing errors but also be arbitrage free. Our methods...

Previous authors have raised the concern that there could be serious survival bias in the observed U.S. equity premium. Contrary to conventional wisdom, we argue that the survival bias in the U.S. data is unlikely to be significant. To reach this conclusion, we introduce a general framework for...