• Bernoulli
  • Volume 20, Number 2 (2014), 645-675.

Simple simulation of diffusion bridges with application to likelihood inference for diffusions

Mogens Bladt and Michael Sørensen

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With a view to statistical inference for discretely observed diffusion models, we propose simple methods of simulating diffusion bridges, approximately and exactly. Diffusion bridge simulation plays a fundamental role in likelihood and Bayesian inference for diffusion processes. First a simple method of simulating approximate diffusion bridges is proposed and studied. Then these approximate bridges are used as proposal for an easily implemented Metropolis–Hastings algorithm that produces exact diffusion bridges. The new method utilizes time-reversibility properties of one-dimensional diffusions and is applicable to all one-dimensional diffusion processes with finite speed-measure. One advantage of the new approach is that simple simulation methods like the Milstein scheme can be applied to bridge simulation. Another advantage over previous bridge simulation methods is that the proposed method works well for diffusion bridges in long intervals because the computational complexity of the method is linear in the length of the interval. For $\rho$-mixing diffusions the approximate method is shown to be particularly accurate for long time intervals. In a simulation study, we investigate the accuracy and efficiency of the approximate method and compare it to exact simulation methods. In the study, our method provides a very good approximation to the distribution of a diffusion bridge for bridges that are likely to occur in applications to statistical inference. To illustrate the usefulness of the new method, we present an EM-algorithm for a discretely observed diffusion process.

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Bernoulli, Volume 20, Number 2 (2014), 645-675.

First available in Project Euclid: 28 February 2014

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Bayesian inference diffusion bridge discretely sampled diffusions EM-algorithm likelihood inference Milstein scheme pseudo-marginal MCMC time-reversion


Bladt, Mogens; Sørensen, Michael. Simple simulation of diffusion bridges with application to likelihood inference for diffusions. Bernoulli 20 (2014), no. 2, 645--675. doi:10.3150/12-BEJ501.

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