A filtering approach to tracking volatility from prices observed at random times

DOI10.1214/105051606000000222MaRDI QIDQ862222zbMATH OpenOpenAlexFDO

Authors Jakša Cvitanić, R. Liptser, B. Rozovskii

Publication date 5 February 2007

Published in The Annals of Applied Probability (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/math/0612212

zbMATH Keywords

volatilitynonlinear filteringdiscrete observationsasset price model

Mathematics Subject Classification ID

Bayesian inference (62F15) Inference from stochastic processes and prediction (62M20) Applications of statistics to actuarial sciences and financial mathematics (62P05) Signal detection and filtering (aspects of stochastic processes) (60G35)

Abstract: This paper is concerned with nonlinear filtering of the coefficients in asset price models with stochastic volatility. More specifically, we assume that the asset price process $S=(S_t{)}_{tgeq0}$ is given by [ dS_{t}=m( heta_{t})S_{t} dt+v( heta_{t})S_{t} dB_{t}, ] where $B=(B_t{)}_{tgeq0}$ is a Brownian motion, $v$ is a positive function and $heta=(het{a}_t{)}_{tgeq0}$ is a c'{a}dl'{a}g strong Markov process. The random process $heta$ is unobservable. We assume also that the asset price $S_t$ is observed only at random times $0<a{u}_1<a{u}_2<\mathrm{....}$ This is an appropriate assumption when modeling high frequency financial data (e.g., tick-by-tick stock prices). In the above setting the problem of estimation of $heta$ can be approached as a special nonlinear filtering problem with measurements generated by a multivariate point process $(a{u}_k,log{S}_{a{u}_k})$. While quite natural, this problem does not fit into the ``standard diffusion or simple point process filtering frameworks and requires more technical tools. We derive a closed form optimal recursive Bayesian filter for $het{a}_t$, based on the observations of $(a{u}_k,log{S}_{a{u}_k}{)}_{kgeq1}$. It turns out that the filter is given by a recursive system that involves only deterministic Kolmogorov-type equations, which should make the numerical implementation relatively easy.

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• A NONLINEAR FILTERING APPROACH TO VOLATILITY ESTIMATION WITH A VIEW TOWARDS HIGH FREQUENCY DATA
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Cited in

(25)

• Stochastic modelling with randomized Markov bridges
• Stochastic modelling with randomized Markov bridges
• Implied filtering densities on the hidden state of stochastic volatility
• Robust filtering algorithm for Markov jump processes with high-frequency counting observations
• Online Change Detection for a Poisson Process with a Phase-Type Change-Time Prior Distribution
• A coupled system of integrodifferential equations arising in liquidity risk model
• A NONLINEAR FILTERING APPROACH TO VOLATILITY ESTIMATION WITH A VIEW TOWARDS HIGH FREQUENCY DATA
• \(\mathcal{L}_1 \)-optimal filtering of Markov jump processes. I: Exact solution and numerical implementation schemes
• Risk Minimization for a Filtering Micromovement Model of Asset Price
• Bayesian Inference via Filtering Equations for Ultrahigh Frequency Data (I): Model and Estimation
• Nonlinear Filtering for Markov Systems with Delayed Observations
• On Binomial Observations of Continuous-Time Markovian Population Models
• A branching particle approximation to a filtering micromovement model of asset price
• Application of optimal filtering methods for on-line of queueing network states
• Pricing credit derivatives under incomplete information: a nonlinear-filtering approach
• Filtering of the Markov jump process given the observations of multivariate point process
• Volatility and volatility-linked derivatives: estimation, modeling, and pricing
• Volatility estimation from short time series of stock prices
• Mean-variance portfolio selection for partially observed point processes
• A simulation approach to optimal stopping under partial information
• Expected power-utility maximization under incomplete information and with Cox-process observations
• Filtering with marked point process observations via Poisson chaos expansion
• Price estimation via Bayesian filtering and optimal bid-ask prices for market makers
• Expected log-utility maximization under incomplete information and with Cox-process observations
• Filtering for stochastic volatility from point process observation

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