A quasi-maximum likelihood method for estimating the parameters of multivariate diffusions

Stan Hurn, Andrew McClelland () and Kenneth Lindsay ()
Additional contact information
Andrew McClelland: QUT
Kenneth Lindsay: University of Glasgow

No 65, NCER Working Paper Series from National Centre for Econometric Research

Abstract: This paper develops a quasi-maximum likelihood (QML) procedure for estimating the parameters of multi-dimensional stochastic differential equations. The transitional density is taken to be a time-varying multivariate Gaussian where the first two moments of the distribution are approximately the true moments of the unknown transitional density. For affine drift and diffusion functions, the moments are shown to be exactly those of the true transitional density and for nonlinear drift and diffusion functions the approximation is extremely good. The estimation procedure is easily generalizable to models with latent factors, such as the stochastic volatility class of model. The QML method is as effective as alternative methods when proxy variables are used for unobserved states. A conditioning estimation procedure is also developed that allows parameter estimation in the absence of proxies.

Keywords: stochastic differential equations; parameter estimation; quasi-maximum likelihood; moments (search for similar items in EconPapers)
JEL-codes: C22 C52 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2010-10-28
New Economics Papers: this item is included in nep-ecm and nep-ore
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http://www.ncer.edu.au/papers/documents/WPNo65.pdf (application/pdf)

Related works:
Journal Article: A quasi-maximum likelihood method for estimating the parameters of multivariate diffusions (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:qut:auncer:2010_12

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