- Control Variates For Variance Reduction In Indirect Inference: Interest Rate Models In Continuous Time
AbstractSimulation estimators, such as indirect inference or simulated maximum likelihood, are successfully employed for estimating stochastic differential equations. They adjust for the bias (inconsistency) caused by discretization of the underlying stochastic process, which is in continuous time. The price to be paid is an increased variance of the estimated parameters. The variance suffers from an additional component, which depends on the stochastic simulation involved in the estimation procedure. To reduce this undesirable effect, one could properly increase the number of simulations (or the length of each simulation) and thus the computational cost. Alternatively, this paper shows how variance reduction can be achieved, at virtually no additional computational cost, by use of control variates. The Ornstein-Uhlenbeck process, used by Vasicek to model the short term interest rate in continuous time, and the square-root process, used by Cox, Ingersoll and Ross, are explicitly considered and experimented with. Monte Carlo experiments show a global efficiency gain of almost 50% over the simple indirect estimator.
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Bibliographic InfoPaper provided by Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) in its series Working Papers. Serie AD with number 1998-09.
Length: 19 pages
Date of creation: Jan 1998
Date of revision:
Publication status: Published by Ivie
Efficient Monte Carlo; Variance reduction technique; control variates;
Other versions of this item:
- Giorgio Calzolari & Francesca Di Iorio & Gabriele Fiorentini, 1998. "Control variates for variance reduction in indirect inference: Interest rate models in continuous time," Econometrics Journal, Royal Economic Society, vol. 1(Conferenc), pages C100-C112.
- Calzolari, Giorgio & Di Iorio, Francesca & Fiorentini, Gabriele, 1996. "Control variates for variance reduction in indirect inference: interest rate models in continuous time," MPRA Paper 23160, University Library of Munich, Germany, revised Nov 1996.
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
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