RECURSIVE BAYESIAN ESTIMATION IN FORWARD PRICE MODELS IMPLIED BY FAIR PRICING

Yassine El Qalli ()
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Yassine El Qalli: Department of Mathematics, Faculty of Sciences Semlalia, Cadi Ayyad University, BP 2390, Marrakesh, Morocco

International Journal of Theoretical and Applied Finance (IJTAF), 2010, vol. 13, issue 02, 301-333

Abstract: In this paper we describe a recursive Bayesian algorithm for the estimation of forward price models. The forward price is modeled within the benchmark framework for a forward price volatility function which includes a stochastic variable; a forward price with a liquidly traded maturity. A relationship between the bond price, the spot price and certain forward prices is stated. We set up the stochastic real world dynamics for these discretely compounded market observed forward prices. We propose a dynamic Bayesian estimation algorithm for a Monte Carlo time-discretized version of the resulting forward prices dynamics. The parameter to be estimated is a vector consisting of the forward price volatility parameters and the benchmarked bond price volatility parameters.

Keywords: Term structure models; forward price; volatility structure; benchmark approach; Bayesian estimation; nonlinear filtering (search for similar items in EconPapers)
Date: 2010
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Persistent link: https://EconPapers.repec.org/RePEc:wsi:ijtafx:v:13:y:2010:i:02:n:s0219024910005784

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DOI: 10.1142/S0219024910005784

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