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Bayesian inference for discretely sampled Markov processes with closed-form likelihood expansions
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Stramer, O., Bognar, M. and Schneider, Paul (2010) Bayesian inference for discretely sampled Markov processes with closed-form likelihood expansions. Journal of Financial Econometrics, Vol.8 (No.4). pp. 450-480. doi:10.1093/jjfinec/nbp027 ISSN 1479-8409.
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Official URL: http://dx.doi.org/10.1093/jjfinec/nbp027
Abstract
This article proposes a new Bayesian Markov chain Monte Carlo (MCMC) methodology for estimation of a wide class of multidimensional jump-diffusion models. Our approach is based on the closed-form (CF) likelihood approximations of Ait-Sahalia (2002, 2008). The CF likelihood approximation does not integrate to 1; it is very close to 1 when in the center of the distribution but can differ markedly from 1 when far in the tails. We propose an MCMC algorithm that addresses the problems that arise when the CF approximation is applied in a Bayesian context. The efficacy of our approach is demonstrated in a simulation study of the Cox-Ingersoll-Ross and Heston models and is applied to two well-known datasets.
Item Type: | Journal Article | ||||
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Subjects: | H Social Sciences > HG Finance | ||||
Divisions: | Faculty of Social Sciences > Warwick Business School > Finance Group Faculty of Social Sciences > Warwick Business School |
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Journal or Publication Title: | Journal of Financial Econometrics | ||||
Publisher: | Oxford University Press | ||||
ISSN: | 1479-8409 | ||||
Official Date: | 2010 | ||||
Dates: |
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Volume: | Vol.8 | ||||
Number: | No.4 | ||||
Number of Pages: | 31 | ||||
Page Range: | pp. 450-480 | ||||
DOI: | 10.1093/jjfinec/nbp027 | ||||
Status: | Peer Reviewed | ||||
Publication Status: | Published | ||||
Access rights to Published version: | Restricted or Subscription Access |
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