Transition probabilities in a problem of stochastic process switching

Dirk Veestraeten

Economics Letters, 2012, vol. 114, issue 2, 201-204

Abstract: Extant solutions for state-contingent process switching use first-passage time densities or differential equations. We alternatively employ transition probabilities. These conditional likelihood functions also have obvious appeal for econometric analyses as well as derivative pricing and decision making under absorption and extinction.

Keywords: Absorption; Derivative pricing; Maximum likelihood estimation; Stochastic process switching; Transition probability (search for similar items in EconPapers)
JEL-codes: C24 F31 G12 (search for similar items in EconPapers)
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:114:y:2012:i:2:p:201-204

DOI: 10.1016/j.econlet.2011.09.042

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