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Stochastic Volatility Model with Filtering 

Authors: Robert J. Elliott a; Hong Miao a
Affiliation:   a Haskayne School of Business, University of Calgary, Calgary, Alberta, Canada
DOI: 10.1080/07362990600629389
Publication Frequency: 6 issues per year
Published in: journal Stochastic Analysis and Applications, Volume 24, Issue 3 July 2006 , pages 661 - 683
Formats available: HTML (English) : PDF (English)
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Abstract

We generalize the stochastic volatility model by allowing the volatility to follow different dynamics in different states of the world. The dynamics of the “states of the world” are represented by a Markov chain. We estimate all the parameters by using the filtering and the EM algorithms. Closed form estimates for all parameters are derived in this paper. These estimates can be updated using new information as it arrives.
Keywords: EM algorithm; Filtering; Markov switching; Stochastic volatility
Mathematics Subject Classification: 60J05; 93E11; 60G35
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