Application of maximum likelihood estimation to stochastic short rate models

Kevin John Fergusson, Eckhard Platen

Research output: Contribution to journalArticleResearchpeer-review

Abstract

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.
Original languageEnglish
JournalAnnals of Financial Economics
Volume10
Issue number2
DOIs
Publication statusPublished - 28 Aug 2015
Externally publishedYes

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