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Special Semester on Stochastics with Emphasis on Finance
Linz, September 2008 - December 2008
Presentation: Estimating Models Based on Markov Jump Processes Given Fragmented Observation Series

Workshop: Concluding Workshop

Time: Tue, December 02, 2008, 11:15-11:45

Speaker: Markus Hahn

Abstract

We consider the problem of estimating the rate matrix governing a continuous-time finite-state Markov process given a number of (short) observation series. Such a situation arises naturally whenever there is some sort of break in the data; for financial data think of weekends for daily data or nights for tick-by-tick data. We propose to concatenate the observed series and to employ the emerging (non-Markov) process. We describe the bias arising if standard methods for Markov processes are used for the concatenated process, and provide a post-processing method to correct for this bias. This method works with any estimation approach (maximum likelihood / Bayesian / moment-based) and also applies to general models based on Markov jump processes where the underlying state process is not observed directly.

Presentation slides (pdf, 448 KB)

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