Robust nonlinear filtering of stochastic volatility in finance

ShinIchi Aihara; Arunabha Bagchi

Robust nonlinear filtering of stochastic volatility in finance

ShinIchi Aihara, Arunabha Bagchi

Research output: Chapter in Book/Report/Conference proceeding › Conference contribution › Academic

Abstract

Volatility of the stock price is the key to the pricing problem of stock related derivatives in finance. Volatility appears in the diffusion term of the usual modeling of stock prices. One popular approach is to take volatility to be stochastic, and assumes that it satisfies a stochastic differential equation. Taking the stock price to be the observation, we may then pose the filtering problem of estimating the volatility on line based on the stock price data. This is an unconventional filtering problem which we solve in this paper. But even more interesting is the fact that this filtering algorithm is inherently not robust. In the rest of the paper we derive the robust form of this filter.

Original language	English
Title of host publication	European Control Conference (ECC 2001)
Subtitle of host publication	4-7 Sept. 2001
Place of Publication	Piscataway, NJ
Publisher	IEEE
Pages	1501-1506
Number of pages	6
ISBN (Print)	972-752-047-2
Publication status	Published - 4 Sept 2001
Event	2001 European Control Conference, ECC 2001 - Porto, Portugal Duration: 4 Sept 2001 → 7 Sept 2001

Conference

Conference	2001 European Control Conference, ECC 2001
Abbreviated title	ECC
Country/Territory	Portugal
City	Porto
Period	4/09/01 → 7/09/01

Keywords

METIS-200985

Access to Document

http://ieeexplore.ieee.org/document/7076131/

Cite this

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title = "Robust nonlinear filtering of stochastic volatility in finance",

abstract = "Volatility of the stock price is the key to the pricing problem of stock related derivatives in finance. Volatility appears in the diffusion term of the usual modeling of stock prices. One popular approach is to take volatility to be stochastic, and assumes that it satisfies a stochastic differential equation. Taking the stock price to be the observation, we may then pose the filtering problem of estimating the volatility on line based on the stock price data. This is an unconventional filtering problem which we solve in this paper. But even more interesting is the fact that this filtering algorithm is inherently not robust. In the rest of the paper we derive the robust form of this filter.",

keywords = "METIS-200985",

author = "ShinIchi Aihara and Arunabha Bagchi",

year = "2001",

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T1 - Robust nonlinear filtering of stochastic volatility in finance

AU - Aihara, ShinIchi

AU - Bagchi, Arunabha

PY - 2001/9/4

Y1 - 2001/9/4

N2 - Volatility of the stock price is the key to the pricing problem of stock related derivatives in finance. Volatility appears in the diffusion term of the usual modeling of stock prices. One popular approach is to take volatility to be stochastic, and assumes that it satisfies a stochastic differential equation. Taking the stock price to be the observation, we may then pose the filtering problem of estimating the volatility on line based on the stock price data. This is an unconventional filtering problem which we solve in this paper. But even more interesting is the fact that this filtering algorithm is inherently not robust. In the rest of the paper we derive the robust form of this filter.

AB - Volatility of the stock price is the key to the pricing problem of stock related derivatives in finance. Volatility appears in the diffusion term of the usual modeling of stock prices. One popular approach is to take volatility to be stochastic, and assumes that it satisfies a stochastic differential equation. Taking the stock price to be the observation, we may then pose the filtering problem of estimating the volatility on line based on the stock price data. This is an unconventional filtering problem which we solve in this paper. But even more interesting is the fact that this filtering algorithm is inherently not robust. In the rest of the paper we derive the robust form of this filter.

KW - METIS-200985

M3 - Conference contribution

SN - 972-752-047-2

SP - 1501

EP - 1506

BT - European Control Conference (ECC 2001)

PB - IEEE

CY - Piscataway, NJ

T2 - 2001 European Control Conference, ECC 2001

Y2 - 4 September 2001 through 7 September 2001

ER -