in Peter E. Rossi, ed.,
Modeling Stock Market Volatility:
Bridging the Gap to Continuous Time,
Academic Press, New York, 1996, pp. 357-384.

SPECIFICATION ANALYSIS OF
CONTINUOUS TIME MODELS IN FINANCE

A. Ronald Gallant^*
George Tauchen^†

^*Department of Economics
University of North carolina
Chapel Hill, North Carolina 27599

^†Department of Economics
Duke University
Durham, North Carolina 27708

Abstract

This is an expository chapter that describes how the efficient method of moments (EMM) estimator proposed by Gallant and Tauchen (1996) can be used for estimation and specification analysis of a system of stochastic differential equations (SDEs). The chapter is a summary of previous work. Ideas are illustrated by a yield curve application, and sources of software are indicated.