Efficient Importance Sampling Maximum Likelihood Estimation of Stochastic Differential Equations
Computational Statistics & Data Analysis, Vol. 54, No. 11, pp. 2753-2762, November 2010
Posted: 14 Apr 2011
Date Written: November 1, 2010
Maximum likelihood estimation (MLE) of stochastic differential equations (SDEs) is difficult because in general the transition density function of these processes is not known in closed form, and has to be approximated somehow. An approximation based on efficient importance sampling (EIS) is detailed. Monte Carlo experiments, based on widely used diffusion processes, evaluate its performance against an alternative importance sampling (IS) strategy, showing that EIS is at least equivalent, if not superior, while allowing a greater flexibility needed when examining more complicated models.
Keywords: Diffusion process, Stochastic differential equation, Transition density, Importance sampling, Simulated maximum likelihood
JEL Classification: C13, C15, C22
Suggested Citation: Suggested Citation