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Nonlinear Smoother for Stochastic Volatility Model

Author

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  • Miroslav Šimandl
  • Tomáš Soukup

Abstract

A new technique for nonlinear state and parameter estimation of the discrete time stochastic volatility models in the state space form is developed. The Gibbs sampler is used to construct a Markov-chain simulation tool that reflects both inherent model variability and parameter uncertainty. The Gibbs sampling algorithm is derived from the generalized data-augmentation method and the iterative Monte Carlo simulation procedures to calculating marginal state and parameters probability density functions. The design algorithm generates a loop where samples from the correspondent data augmented probability density functions are drawn. The proposed chain converges to equilibrium enabling to summarize the unobserved variance states and unknown model parameters distributions. The non-Gaussian density of the log of squared innovations is advantageously modelled as a mixture of Gaussians.

Suggested Citation

  • Miroslav Šimandl & Tomáš Soukup, 2001. "Nonlinear Smoother for Stochastic Volatility Model," Bulletin of the Czech Econometric Society, The Czech Econometric Society, vol. 8(13).
  • Handle: RePEc:czx:journl:v:8:y:2001:i:13:id:96
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    File URL: http://ces.utia.cas.cz/bulletin/index.php/bulletin/article/view/96
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    More about this item

    Keywords

    Stochastic volatility models; nonlinear estimation; Monte Carlo simulation; methods; Gibbs sampler; financial econometrics; Bayesian approach;

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General

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