Hi Stephen,

You could take a look at

http://sitmo.com/doc/Calibrating_the_Ornstein-Uhlenbeck_model

for the linear regression method, or take a look at the package "sde" which
contains some examples using GMM (not for the Ornstein-Uhlenbeck process,
though, only the CIR).

The half-life is given as log(2)/mean-reversion speed.

Do keep an eye on the partition of the time-axis, e.g. what frequency you
are using (daily, yearly) for interpreting the half-life.

BR,
Bjørn






> ------------------------------
>
> Message: 2
> Date: Tue, 12 Oct 2010 05:43:32 -0400
> From: Sarbo <cmdr_rogue@hotmail.com>
> To: r-sig-finance@stat.math.ethz.ch
> Subject: Re: [R-SIG-Finance] Ornstein-Uhlenbeck
> Message-ID: <BLU0-SMTP21220AA5FD288F890EED317E2540@phx.gbl>
> Content-Type: text/plain; charset="utf-8"
>
> By half-life, do you mean the speed of mean-reversion?
>
> If so, there's a bit of algebraic tomfoolery that's required to
> discretise the equation and then fit the data to it. I don't have the
> time right now to go into all the details but it's not hard- you can
> parameterise the process using simple linear regression. If you need
> help with that I'll try and get back to you tonight about it.
>
> On Tue, 2010-10-12 at 13:47 +1100, Stephen Choularton wrote:
>
> > Hi
> >
> > Wonder if anyone could point me how I use this method to discover the
> > half life of a mean reverting process.
> >
> > I am looking into pair trading and the time it takes for a
> > cointegrated pair to revert to the norm.
> >
> > --
> > Stephen Choularton Ph.D., FIoD
> >
> > 9999 2226
> > 0413 545 182
> >
> >
> > for insurance go to www.netinsure.com.au
> > for markets go to www.organicfoodmarkets.com.au
> >
> >
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