Applications of Numerical Methods in Economics and Finance APPLICATIONS OF NUMERICAL METHODS IN ECONOMICS AND FINANCE By

This dissertation consists of three articles on the applications ofnumerical methods in economics and finance. The first article investigates the performance of various estimators in estimating the continuous time short-term interest rate models under the assumption that the higher moment dynamics of the short rate series are misspecified. The Monte Carlo evidence suggests that volatility of a continuous time short-term interest rate model would be es-timated with a serious bias if the higher moments of the series are misspecified. Further-more, in the root mean square sense, computationally intensive simulation based estima-tors do not exhibit better finite sample performance than the conventional estimators. The second article presents a numerical analysis of optimal initial and maintenance margin setting for futures commission merchants (futures brokers). The problem is ana-lyzed in a profit maximization context using a Markov chain approach and it is shown that the uncertainty regarding the futures price process, the trader's attitude toward a negative margin account and the transaction costs associated with margin calls lead the future