MCMC Methods for Financial Econometrics

Abstract

This chapter discusses Markov Chain Monte Carlo (MCMC) based methods for es- timating continuous-time asset pricing models. We describe the Bayesian approach to empirical asset pricing, the mechanics of MCMC algorithms and the strong theoretical underpinnings of MCMC algorithms. We provide a tutorial on building MCMC algo- rithms and show how to estimate equity price models with factors such as stochastic expected returns, stochastic volatility and jumps, multi-factor term structure models with stochastic volatility, time-varying central tenclancy or jumps and regime switching models.