Maximum Likelihood Estimation (Part 1)

This is the first real video in the series on mean-reverting assets and pairs trading. A viewer requested that I look over and discuss a couple chapters in a book on the aforementioned mean-reverting assets. The first chapter deals with estimating statistical parameters via maximum likelihood estimation. We will discuss what that means and take a look at the simple case of the normal distribution. While this is a simple problem that can be solved analytically, I will also show how it can be solved numerically using Scipy’s optimization tools.

In part two, we will look at the Ornstein-Uhlenbeck process used by the authors and show how we can use the same techniques to estimate those parameters.

The book noted above: Optimal Mean Reverting Trading Mathematical Analysis and Practical Applications by Tim Leung and Xin Li.

Github: https://github.com/kpmooney/numerical_methods_youtube/blob/master/ornstein_uhlenbeck/Max%20Likelihood.ipynb

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