Filtering and Parameter Estimation for a Mean Reverting Interest Rate Model

Robert Elliott, Paul Fischer and Eckhard Platen ()
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Robert Elliott: University of Adelaide

No 17, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: A Hidden Markov Model with mean reverting characteristics is considered as a model for financial time series, particularly interest rates. The optimal filter for the state of the hidden Markov chain is obtained. A number of auxiliary filters are obtained that enable the parameters of the model to be estimated using the EM algorithm. A simulation study demonstrates the feasibility of this approach.

Keywords: filtering; hidden Markov models; interest rate models; EM algorithm (search for similar items in EconPapers)
Date: 1999-08-01
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:uts:rpaper:17

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