This paper proposes a Gaussian estimator for nonlinear continuous time models of the short-term interest rate. The approach is based on a stopping time argument that produces a normalizing transformation facilitating the use of a Gaussian likelihood. A Monte Carlo study shows that the finite-sample performance of the proposed procedure offers an improvement over the discrete approximation method proposed by Nowman (1997). An empirical application to US and British interest rates is given.
YU, Jun and Phillips, Peter C. B..
A Gaussian Approach for Continuous Time Models of Short Term Interest Rates. (2002). Econometrics Journal. 4, (2), 210-224. Research Collection School Of Economics.
Available at: http://ink.library.smu.edu.sg/soe_research/501