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MCMC analysis of diffusion models with application to finance

Eraker, Bjørn
Working paper
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eraker bjorn 0598.pdf (342.5Kb)
URI
http://hdl.handle.net/11250/164095
Date
1998-03
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  • Discussion papers (FOR) [556]
Abstract
In this paper a new method is proposed for estimation of parameters in diffusion processes from discrete observations. The proposed simulation based MCMC methodology applies to a wide class of models including systems with unobservable state variables and non-linearities. We apply the method to the estimation of parameters in one-factor interest rate models of the CEV class and to a generalization of this model to a two-factor model with a stochastic volatility component. The small sample properties of the estimator are studied through sampling experiments for the stochastic volatility model and the results indicate that the method provides accurate estimates at moderate sample sizes.
Description
First draft: August 1997
Publisher
Norwegian School of Economics and Business Administration. Department of Finance and Management Science
Series
Discussion paper
1998:5

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