Maximum Likelihood Estimation of Latent Affine Processes

David S. Bates

NBER Working Paper No. 9673
Issued in May 2003
NBER Program(s):   AP

This article develops a direct filtration-based maximum likelihood methodology for estimating the parameters and realizations of latent affine processes. The equivalent of Bayes' rule is derived for recursively updating the joint characteristic function of latent variables and the data conditional upon past data. Likelihood functions can consequently be evaluated directly by Fourier inversion. An application to daily stock returns over 1953-96 reveals substantial divergences from EMM-based estimates: in particular, more substantial and time-varying jump risk.

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Published: Bates, David S. "Maximum Likelihood Estimation Of Latent Affine Processes," Review of Financial Studies, 2006, v19(3,Fall), 909-965.

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