Filtering a nonlinear stochastic volatility model

Date

2012

Authors

Elliott, R.
Siu, T.
Fung, E.

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Journal article

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Nonlinear Dynamics, 2012; 67(2):1295-1313

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Robert J. Elliott, Tak Kuen Siu and Eric S. Fung

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Abstract

We introduce a class of stochastic volatility models whose parameters are modulated by a hidden nonlinear dynamical system. Our aim is to incorporate the impact of economic cycles, or business cycles, into the long-term behavior of volatility dynamics. We develop a discrete-time nonlinear filter for the estimation of the hidden volatility and the nonlinear dynamical system based on return observations. By exploiting the technique of a reference probability measure we derive filters for the hidden volatility and the nonlinear dynamical system.

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© Springer Science+Business Media B.V. 2011

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