Corrigendum to "A Gaussian Approach for Continuous Time Models of the Short Term Interest Rate"

• Main Authors: PHILLIPS, Peter C. B., YU, Jun
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2011
• Subjects: Nonlinear Diffusion; Normalizing Transformation; Level Effect; DDS Theorem.; Econometrics; Economic Theory; Finance
• Online Access: https://ink.library.smu.edu.sg/soe_research/1237; https://ink.library.smu.edu.sg/context/soe_research/article/2236/viewcontent/py_corr08.pdf
• Institution: Singapore Management University

An error is corrected in Yu and Phillips (2001) (Econometrics Journal, 4, 210-224) where a time transformation was used to induce Gaussian disturbances in the discrete time equivalent model. It is shown that the error process in this model is not a martingale and the Dambis, Dubins-Schwarz (DDS) theorem is not directly applicable. However, a detrended error process is a martingale, the DDS theorem is applicable, and the corresponding stopping time correctly induces Gaussianity. We show that the two stopping time sequences differ by O(a2), where a is the pre-specified normalized timing constant.