To compress the stereo video data

we propose an algorithm for stereo image coding based on hierarchical disparity estimation/compensation. A stereo image pair consists of a reference image and a target image. The reference image is coded by method using JPEG standard

while the target image is coded using the disparity estimation/compensation technique. We apply the wavelet transformation to code the created residual image

and use DPCM(difference pulse coding modulation) to code the disparity fields. Hierarchical Markov Random Field(MRF) model

Rate-Distortion(RD) model and the overlapped block matching/compensation are applied in the hybrid disparity estimation method to obtain a smooth and consistent disparity field. In terms of peak signal to noise ratio(PSNR) of the disparity compensated image

the proposed disparity estimation algorithm achieves about 2 5 dB higher PSNR

as compared to conventional variable size block matching. The experimental results also show that the disparity estimation/compensation in half pixel accuracy and dual-direction can obtain a 3dB higher performance than that of integer pixel accuracy only in horizontal direction. In the same quality of reconstructed image

our coding system can obtain 0 387 bits reduction in terms of coding bit rate of the target image compared to VSBM based scheme

and 1 003 bits reduction compared to the one using JPEG standard to code the target image. The proposed hierarchical model for disparity estimation effectively improves the efficiency of stereo image coding.