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Simulation-Based Estimation

  1. Alain Monfort

Published Online: 15 MAY 2010

DOI: 10.1002/9780470061602.eqf19014

Encyclopedia of Quantitative Finance

Encyclopedia of Quantitative Finance

How to Cite

Monfort, A. 2010. Simulation-Based Estimation. Encyclopedia of Quantitative Finance. .

Author Information

  1. CNAM and CREST, Paris, France

Publication History

  1. Published Online: 15 MAY 2010


In many dynamic financial models involving latent variables, the exact computation of the likelihood function is impossible. To define simulation-based estimation methods, three kinds of simulations have been introduced: the unconditional simulations, the sequentially conditional simulations, and the globally conditional simulations. The estimation methods are also of three kinds: those which change the likelihood function into another objective function, like the indirect inference method, those which keep the likelihood function, and the Bayesian methods. The indirect inference method is described in some detail.


  • latent variables;
  • likelihood function;
  • unconditional simulations;
  • conditional simulations;
  • indirect inference;
  • Bayesian methods