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Title: Regime switching volatility calibration by the Baum-Welch method
Authors: Mitra, S
Date, P
Keywords: Regime switching;Stochastic volatility;Calibration;Hamilton filter;Baum-Welch
Issue Date: 2010
Publisher: Elsevier
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.
ISSN: 0377-042
Appears in Collections:Dept of Mathematics Research Papers
Mathematical Sciences

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