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Recursive Bayesian Estimation In Forward Price Models Implied By Fair Pricing

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  • YASSINE EL QALLI

    (Department of Mathematics, Faculty of Sciences Semlalia, Cadi Ayyad University, BP 2390, Marrakesh, Morocco)

Abstract

In this paper we describe a recursive Bayesian algorithm for the estimation of forward price models. The forward price is modeled within the benchmark framework for a forward price volatility function which includes a stochastic variable; a forward price with a liquidly traded maturity. A relationship between the bond price, the spot price and certain forward prices is stated. We set up the stochastic real world dynamics for these discretely compounded market observed forward prices. We propose a dynamic Bayesian estimation algorithm for a Monte Carlo time-discretized version of the resulting forward prices dynamics. The parameter to be estimated is a vector consisting of the forward price volatility parameters and the benchmarked bond price volatility parameters.

Suggested Citation

  • Yassine El Qalli, 2010. "Recursive Bayesian Estimation In Forward Price Models Implied By Fair Pricing," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 13(02), pages 301-333.
    • Handle: RePEc:wsi:ijtafx:v:13:y:2010:i:02:n:s0219024910005784
    DOI: 10.1142/S0219024910005784
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    References listed on IDEAS

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