Abstract
Continuous-time models are widely used in modern financial research, especially the stochastic processes; it’s a convenient way to describe the dynamic behavior of se- quence of data. The mean-reverting model is the one of most important application in stochastic processes. The aim of this paper to investigate the parametric estimation problem in mean-reverting model. Based on Jun Yu（2012）, he argue that using ordinary least squares method to estimate the mean-reversion parameter in O-U process will result in an up-ward bias, and the bias is more severe when mean-reversion parameter is far away from zero. This paper tries to relax the parametric assumption in O-U process in Jun Yu（2012）and uses variety ways to re-estimate the mean-reversion parameter in O-U process. At first, we use Euler scheme, local linearization, and method of Aït-Sahalia（1999,2002）to illustrate the bias problem, then consider Indirect Inference to solve the bias problem in mean-reversion parameter. Finally, we use 30-days commercial paper as a proxy for short-term interest rate and price bond options.