Consistency of MLEs for partially observed diffusions, with application in market microstructure modelling

Abstract This paper presents a tractable sufficient condition for the consistency of maximum likelihood estimators (MLEs) in partially observed diffusion models, stated in terms of the stationary distribution of the associated fully observed diffusion, under the assumption that the set of unknown parameter values is finite. This sufficient condition is then verified in the context of a latent price model of market microstructure, yielding consistency of maximum likelihood estimators of the unknown parameters in this model. Finally, we compute the latter estimators using historical financial data taken from the NASDAQ exchange.