Filtering and identification of Heston's stochastic volatility model and its market risk

ShinIchi Aihara, Arunabha Bagchi

    Research output: Contribution to journalArticleAcademicpeer-review

    6 Citations (Scopus)

    Abstract

    We study the filtering problem for the stochastic volatility model of Heston by using the nonlinear estimation theory. To solve the estimation problem for the stochastic volatility process, we use the random time change method. The derived basic equation for the filtering is the so-called Zakai equation and its numerically realized algorithm is proposed with the aid of the splitting-up method. Regarding the European call option problem, the identification of the market price of the volatility risk is also studied. Some numerical simulation studies are demonstrated to show the advantage of the proposed method.
    Original languageUndefined
    Article number10.1016/j.jedc.2005.06.017
    Pages (from-to)2363-2388
    Number of pages26
    JournalJournal of economic dynamics & control
    Volume30
    Issue number2/12
    DOIs
    Publication statusPublished - Dec 2006

    Keywords

    • JEL-G13
    • IR-62910
    • METIS-238060
    • EWI-3760

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