Maximum Likelihood Estimation of Latent Affine Processes
This article develops a direct filtration-based maximum likelihood methodology for estimating the parameters and realizations of latent affine processes. The equivalent of Bayes' rule is derived for recursively updating the joint characteristic function of latent variables and the data conditional upon past data. Likelihood functions can consequently be evaluated directly by Fourier inversion. An application to daily stock returns over 1953-96 reveals substantial divergences from EMM-based estimates: in particular, more substantial and time-varying jump risk.
|Date of creation:||May 2003|
|Date of revision:|
|Publication status:||published as Bates, David S. "Maximum Likelihood Estimation Of Latent Affine Processes," Review of Financial Studies, 2006, v19(3,Fall), 909-965.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
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