## MCMC methods for continuous-time financial econometrics (2003)

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Citations: | 24 - 1 self |

### BibTeX

@MISC{Johannes03mcmcmethods,

author = {Michael Johannes and Nicholas Polson},

title = {MCMC methods for continuous-time financial econometrics},

year = {2003}

}

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### Abstract

This chapter develops Markov Chain Monte Carlo (MCMC) methods for Bayesian inference in continuous-time asset pricing models. The Bayesian solution to the inference problem is the distribution of parameters and latent variables conditional on observed data, and MCMC methods provide a tool for exploring these high-dimensional, complex distributions. We first provide a description of the foundations and mechanics of MCMC algorithms. This includes a discussion of the Clifford-Hammersley theorem, the Gibbs sampler, the Metropolis-Hastings algorithm, and theoretical convergence properties of MCMC algorithms. We next provide a tutorial on building MCMC algorithms for a range of continuous-time asset pricing models. We include detailed examples for equity price models, option pricing models, term structure models, and regime-switching models. Finally, we discuss the issue of sequential Bayesian inference, both for parameters and state variables.