This paper proposes a Gaussian estimator for nonlinear continuous time models of the short term interest rate. The approach is based on a stopping time argument that produces a normalizing transformation facilitating the use of a Gaussian likelihood. A Monte Carlo study shows that the ﬁnite sample performance of the proposed procedure oﬀers an improvement over the discrete approximation method proposed by Nowman (1997). An empirical application to U.S. and British interest rates is given.
Yu, Jun and Phillips, Peter C.B., "Gaussian Estimation of Continuous Time Models of the Short Term Interest Rate" (2001). Cowles Foundation Discussion Papers. 1568.