Regime Switching Volatility Calibration by the Baum-Welch Method

Autor:	Mitra, Sovan
Rok vydání:	2009
Předmět:	Quantitative Finance - Statistical Finance Quantitative Finance - Computational Finance
Druh dokumentu:	Working Paper
Popis:	Regime switching volatility models provide a tractable method of modelling stochastic volatility. Currently the most popular method of regime switching calibration is the Hamilton filter. We propose using the Baum-Welch algorithm, an established technique from Engineering, to calibrate regime switching models instead. We demonstrate the Baum-Welch algorithm and discuss the significant advantages that it provides compared to the Hamilton filter. We provide computational results of calibrating the Baum-Welch filter to S&P 500 data and validate its performance in and out of sample.
Databáze:	arXiv
Externí odkaz:	http://arxiv.org/abs/0904.1500 Zobrazit plný text záznamu View this record from Arxiv