Estimating the parameters of stochastic differential equations. (English) Zbl 0927.62082

Summary: Two maximum likelihood methods for estimating the parameters of stochastic differential equations (SDEs) from time-series data are proposed. The first is that of simulated maximum likelihood in which a nonparametric kernel is used to construct the transitional density of an SDE from a series of simulated trials. The second approach uses a spectral technique to solve the Kolmogorov equation satisfied by the transitional probability density. The exact likelihood function for a geometric random walk is used as a benchmark against which the performance of each method is measured. Both methods perform well with the spectral method returning results which are practically identical to those derived from the exact likelihood. The technique is illustrated by modelling interest rates in the UK gilts market using a fundamental one-factor term-structure equation for the instantaneous rate of interest.


62M09 Non-Markovian processes: estimation
62M10 Time series, auto-correlation, regression, etc. in statistics (GARCH)
62M05 Markov processes: estimation; hidden Markov models
60H15 Stochastic partial differential equations (aspects of stochastic analysis)
65C60 Computational problems in statistics (MSC2010)
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