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Robustification of Elliott's on-line EM algorithm for HMMs

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  • Christina Erlwein
  • Peter Ruckdeschel

Abstract

In this paper, we establish a robustification of an on-line 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.

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  • Christina Erlwein & Peter Ruckdeschel, 2013. "Robustification of Elliott's on-line EM algorithm for HMMs," Papers 1304.2069, arXiv.org.
    • Handle: RePEc:arx:papers:1304.2069
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    References listed on IDEAS

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    1. Andrew Ang & Geert Bekaert, 2002. "International Asset Allocation With Regime Shifts," The Review of Financial Studies, Society for Financial Studies, vol. 15(4), pages 1137-1187.
    2. Guidolin, Massimo & Timmermann, Allan, 2007. "Asset allocation under multivariate regime switching," Journal of Economic Dynamics and Control, Elsevier, vol. 31(11), pages 3503-3544, November.
    3. Robert Elliott & Juri Hinz, 2003. "A method for portfolio choice," Applied Stochastic Models in Business and Industry, John Wiley & Sons, vol. 19(1), pages 1-11, January.
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