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Joint Cross‐Section/Time‐Series Maximum Likelihood Estimation for the Parameters of the Cox‐Ingersoll‐Ross Bond Pricing Model
Author(s) -
Daves Phillip R.,
Ehrhardt Michael C.
Publication year - 1993
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.1993.tb01345.x
Subject(s) - econometrics , estimator , series (stratigraphy) , bond , joint (building) , maximum likelihood , interest rate , bond valuation , economics , computer science , mathematics , statistics , finance , engineering , architectural engineering , paleontology , biology
We develop a joint maximum likelihood estimator for the interest rate risk premium and the parameters of the Cox, Ingersoll, and Ross bond pricing model. This new approach resolves difficulties inherent in previous approaches that use only time‐series data or cross‐sectional data. We apply the new approach to a large sample of joint time‐series/cross‐sectional data. The resulting estimated parameters explain simultaneously the changes in short‐term interest rates and the prices of zero‐coupon bonds with various maturities. We also identify and provide solutions to potential computational difficulties that other researchers are likely to face.