Maximum Likelihood Estimation of Latent Affine Processes
David S. Bates
Review of Financial Studies, 2006, vol. 19, issue 3, 909-965
This article develops a direct filtration-based maximum likelihood methodology for estimating the parameters and realizations of latent affine processes. Filtration is conducted in the transform space of characteristic functions, using a version of Bayes' rule for recursively updating the joint characteristic function of latent variables and the data conditional upon past data. An application to daily stock market returns over 1953--1996 reveals substantial divergences from estimates based on the Efficient Methods of Moments (EMM) methodology; in particular, more substantial and time-varying jump risk. The implications for pricing stock index options are examined. Copyright 2006, Oxford University Press.
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Persistent link: https://EconPapers.repec.org/RePEc:oup:rfinst:v:19:y:2006:i:3:p:909-965
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