Abstract :
A new consistent test is proposed for the parametric specification of the diffusion
function in a diffusion process without any restrictions on the functional form of
the drift function+ The data are assumed to be sampled discretely in a time interval
that can be fixed or lengthened to infinity+ The test statistic is shown to follow
an asymptotic normal distribution under the null hypothesis that the parametric
diffusion function is correctly specified+ Monte Carlo simulations are conducted
to examine the finite-sample performance of the test, revealing that the test has
good size and power+
