Filtering a nonlinear stochastic volatility model

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

*Corresponding author for this work

Research output: Contribution to journalArticle

9 Citations (Scopus)

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.

Original languageEnglish
Pages (from-to)1295-1313
Number of pages19
JournalNonlinear Dynamics
Volume67
Issue number2
DOIs
Publication statusPublished - Jan 2012

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