Handbooks of Research Methods and Applications series
Edited by Nigar Hashimzade and Michael A. Thornton
Chapter 15: Maximum likelihood estimation of time series models: the Kalman filter and beyond
The purpose of this chapter is to provide a comprehensive treatment of likelihood inference for state space models. These are a class of time series models relating an observable time series to quantities called states, which are characterized by a simple temporal dependence structure, typically a first order Markov process. The states sometimes have substantial interpretation. Key estimation problems in economics concern latent variables, such as the output gap, potential output, the nonaccelerating inflation rate of unemployment, or NAIRU, core inflation, and so forth. Time-varying volatility, which is quintessential to finance, is also an important feature in macroeconomics. In the multivariate framework relevant features can be common to different series, meaning that the driving forces of a particular feature and/or the transmission mechanism are the same.
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