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Robustification of an On-line EM Algorithm for Modelling Asset Prices Within an HMM

In: Hidden Markov Models in Finance

Author

Listed:
  • Christina Erlwein-Sayer

    (Fraunhofer ITWM)

  • Peter Ruckdeschel

    (Fraunhofer ITWM)

Abstract

In this paper, we establish a robustification of Elliott’s on-line EM algorithm for modelling asset prices within a hidden Markov model (HMM). In this HMM framework, parameters of the model are guided by a Markov chain in discrete time, parameters of the asset returns are therefore able to switch between different regimes. The parameters are estimated through an on-line algorithm, which utilizes incoming information from the market and leads to adaptive optimal estimates. We robustify this algorithm step by step against additive outliers appearing in the observed asset prices with the rationale to better handle possible peaks or missings in asset returns.

Suggested Citation

  • Christina Erlwein-Sayer & Peter Ruckdeschel, 2014. "Robustification of an On-line EM Algorithm for Modelling Asset Prices Within an HMM," International Series in Operations Research & Management Science, in: Rogemar S. Mamon & Robert J. Elliott (ed.), Hidden Markov Models in Finance, edition 127, chapter 0, pages 1-31, Springer.
    • Handle: RePEc:spr:isochp:978-1-4899-7442-6_1
    DOI: 10.1007/978-1-4899-7442-6_1
    as

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