Application of Maximum Likelihood Estimation to Stochastic Short Rate Models

Kevin Fergusson and Eckhard Platen ()

No 361, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: The application of maximum likelihood estimation is not well studied for stochastic short rate models because of the cumbersome detail of this approach. We investigate the applicability of maximum likelihood estimation to stochastic short rate models. We restrict our consideration to three important short rate models, namely the Vasicek, Cox-Ingersoll-Ross and 3/2 short rate models, each having a closed-form formula for the transition density function. The parameters of the three interest rate models are fitted to US cash rates and are found to be consistent with market assessments.

Keywords: Stochastic short rate; maximum likelihood estimation; Vasicek model; Cox-Ingersoll-Ross model; 3/2 model (search for similar items in EconPapers)
Pages: 24 pages
Date: 2015-07-01
New Economics Papers: this item is included in nep-ecm and nep-ore
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Citations: View citations in EconPapers (15)

Published as: Fergusson, K. and Platen, E., 2015, "Application of Maximum Likelihood Estimation to Stochastic Short Rate Models", Annals of Financial Economics, 10(2), 1-26.

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https://www.uts.edu.au/sites/default/files/qfr-archive-03/QFR-rp361.pdf (application/pdf)

Related works:
Journal Article: APPLICATION OF MAXIMUM LIKELIHOOD ESTIMATION TO STOCHASTIC SHORT RATE MODELS (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:uts:rpaper:361

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