Application of Maximum Likelhood Estimation to Stochastic Short Rate Models

World Scientific Publishing Company
Publication Type:
Journal Article
Annals of Financial Economics, 2015, 10 (2), pp. 1550009 - 1550009
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The application of maximum likelihood estimation is not well studied for stochastic short rate models because of the cumbersome detail of this approach. We investigate the applicability of maximum likelihood estimation to stochastic short rate models. We restrict our consideration to three important short rate models, namely the Vasicek, Cox–Ingersoll–Ross (CIR) and 3/2 short rate models, each having a closed-form formula for the transition density function. The parameters of the three interest rate models are fitted to US cash rates and are found to be consistent with market assessments
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