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|Title:||Regime switching volatility calibration by the Baum-Welch method|
|Keywords:||Regime switching;Stochastic volatility;Calibration;Hamilton filter;Baum-Welch|
|Citation:||Journal of Computational and Applied Mathematics. 234(12): 3243–3260, Oct 2010|
|Abstract:||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 and comparing the performance of the Baum-Welch and the Hamilton filter to S&P 500 and Nikkei 225 data, examining their performance in and out of sample.|
|Appears in Collections:||Mathematical Science|
Dept of Mathematics Research Papers
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