Abstract

For certain types of statistical models, the characteristic function (Fourier transform) is available in closed form, whereas the probability density function has an intractable form, typically as an infinite sum of probability weighted densities. Important such examples include solutions of stochastic differential equations with jumps, the Tweedie model, and Poisson mixture models. We propose a novel and general numerical method for retrieving the probability density function from the characteristic function. Unlike methods based on direct application of quadrature to the inverse Fourier transform, the proposed method allows accurate evaluation of the log-probability density function arbitrarily far out in the tail. Moreover, unlike saddlepoint approximations, the proposed methodology can be made arbitrarily accurate. Owing to these properties, the proposed method is computationally stable and very accurate under log-likelihood optimisation. The method is illustrated for a normal variance-mean mixture, and in an application of maximum likelihood estimation to a jump diffusion model for financial data.

Berent Å. S. Lunde

Senior Consultant | Adjunct Associate Professor