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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. 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 |
|---|---|
| Subjects: | H Social Sciences > HG Finance |
| Divisions: | Faculty of Social Sciences > Warwick Business School > Finance Group Faculty of Social Sciences > Warwick Business School |
| Journal or Publication Title: | Journal of Financial Econometrics |
| Publisher: | Oxford University Press |
| ISSN: | 1479-8409 |
| Date: | 2010 |
| Volume: | Vol.8 |
| Number: | No.4 |
| Number of Pages: | 31 |
| Page Range: | pp. 450-480 |
| Identification Number: | 10.1093/jjfinec/nbp027 |
| Status: | Peer Reviewed |
| Publication Status: | Published |
| Access rights to Published version: | Restricted or Subscription Access |
| URI: | http://wrap.warwick.ac.uk/id/eprint/42077 |
Data sourced from Thomson Reuters' Web of Knowledge
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