Volatility extraction using the Kalman filter

Alexandr Kuchynka ()
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Alexandr Kuchynka: Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic, http://ies.fsv.cuni.cz/

No 2008/10, Working Papers IES from Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies

Abstract: This paper focuses on the extraction of volatility of financial returns. The volatility process is modeled as a superposition of two autoregressive processes which represent the more persistent factor and the quickly mean-reverting factor. As the volatility is not observable, the logarithm of the daily high-low range is employed as its proxy. The estimation of parameters and volatility extraction are performed using a modified version of the Kalman filter which takes into account the finite sample distribution of the proxy.

Keywords: volatility; stochastic volatility models; Kalman filter; volatility proxy (search for similar items in EconPapers)
JEL-codes: C22 G15 (search for similar items in EconPapers)
Pages: 15 pages
Date: 2008-06, Revised 2008-06
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-ore
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