Michael Johannes

MCMC Maximum Likelihood for Latent State Models

Coauthor(s): Eric Jacquier, Nicholas Polson.

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Abstract:
This paper develops a pure simulation-based approach for computing maximum likelihood estimates in latent state variable models using Markov Chain Monte Carlo methods (MCMC). Our MCMC algorithm simultaneously evaluates and optimizes the likelihood function without resorting to gradient methods. The approach relies on data augmentation, with insights similar to simulated annealing and evolutionary Monte Carlo algorithms. We prove a limit theorem in the degree of data augmentation and use this to provide standard errors and convergence diagnostics. The resulting estimator inherits the sampling asymptotic properties of maximum likelihood. We demonstrate the approach on two latent state models central to financial econometrics: a stochastic volatility and a multivariate jump-diffusion models. We find that convergence to the MLE is fast, requiring only a small degree of augmentation.

Source: Journal of Econometrics
Exact Citation:
Jacquier, Eric, Michael Johannes, and Nicholas Polson. "MCMC Maximum Likelihood for Latent State Models." Journal of Econometrics 137, no. 2 (April 2007): 615-640.
Volume: 137
Number: 2
Pages: 615-640
Date: 4 2007