PARAMETER ESTIMATION FOR A REGIME-SWITCHING MEAN-REVERTING MODEL WITH JUMPS

Ping Wu () and Robert J. Elliott ()
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Ping Wu: RBC Capital Markets, Royal Bank of Canada, Toronto, Ontario, Canada M5J2W7, Canada
Robert J. Elliott: Faculty of Management, University of Calgary, Alberta, Canada T6G2E1, Canada

International Journal of Theoretical and Applied Finance (IJTAF), 2005, vol. 08, issue 06, 791-806

Abstract: In this paper we propose a type of mean reverting model with jumps, where the mean reverting level changes according to a continuous time, finite state Markov chain. This model could be applied to the interest rate and energy markets. We apply filtering techniques and obtain finite dimensional filters for the unobservable state of the Markov chain based on observations of the mean reverting diffusion. Various auxiliary filters are developed that allow us to estimate the parameters of the Markov chain by the EM algorithm. A simulation study is done for a concrete example.

Keywords: Reference probability; martingales; filtering equations; jump process (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (2)

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DOI: 10.1142/S0219024905003268

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