Volatility Estimation via Hidden Markov Models
Alessandro Rossi () and
Giampiero Gallo ()
Econometrics Working Papers Archive from Universita' degli Studi di Firenze, Dipartimento di Statistica, Informatica, Applicazioni "G. Parenti"
In this paper we suggest a convenient way to obtain parameter estimates of a discrete state hidden Markov volatility process within a framework consistent with observed option prices and stochastic volatility. Relative to similar proposals, we simplify the model estimation by resorting to some parametric approximation of the model in a maximum likelihood context. We show how correlation between returns and volatility innovations can be easily accommodated within this framework. Empirical applications illustrate model search strategies for the SP500 stock index, comparing the performances to a standard GARCH model.
Keywords: Stochastic volatility; Hidden Markov; GARCH; Smile-consistent option pricing; Forecasting. (search for similar items in EconPapers)
JEL-codes: C22 C53 G13 (search for similar items in EconPapers)
Pages: 33 pages
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-fin and nep-fmk
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Journal Article: Volatility estimation via hidden Markov models (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:fir:econom:wp2002_14
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