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Research Report FMRR98-004
Filtering and parameter estimation for a mean reverting interest rate model
Robert Elliott, Paul Fischer and Eckhard Platen
Abstract:
A Hidden Markov Model with mean reverting characteristics is considered
as a model for financial time series, particularly interest rates. The
optimal filter for the state of the hidden Markov chain is obtained.
A number of auxiliary filters are obtained that enable the parameters of
the model to be estimated using the EM algorithm. A simulation study
demonstrates the feasibility of this approach.
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