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Seeing the wood for the trees: A critical evaluation of methods to estimate the parameters of stochastic differential equations

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  • Stan Hurn
  • J.Jeisman
  • K.A. Lindsay

Abstract

Maximum likelihood (ML) estimates of the parameters of stochastic differential equations (SDEs) are consistent and asymptotically efficient, but unfortunately difficult to obtain if a closed form expression for the transitional density of the process is not available. As a result, a large number of competing estimation procedures have been proposed. This paper provides a critical evaluation of the various estimation techniques. Special attention is given to the ease of implementation and comparative performance of the procedures when estimating the parameters of the Cox-IngersollRoss and Ornstein-Uhlenbeck equations respectively.

Suggested Citation

  • Stan Hurn & J.Jeisman & K.A. Lindsay, 2006. "Seeing the wood for the trees: A critical evaluation of methods to estimate the parameters of stochastic differential equations," Stan Hurn Discussion Papers 2006, School of Economics and Finance, Queensland University of Technology.
    • Handle: RePEc:qut:sthurn:2006
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    Keywords

    stochastic differential equations; parameter estimation; maximum likelihood; simulation; moments;
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