Smith, J. Q. and Santos, Antonio A. F. (2012) Second-order filter distribution approximations for financial time series with extreme outliers. Journal of Business & Economic Statistics , Volume 24 (Number 3). pp. 329-337. doi:10.1198/073500105000000199

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Abstract

Particle filters are regularly used to obtain the filter distributions associated with state-space financial time series. The most common use today is the auxiliary particle filter (APF) method in conjunction with a first-order Taylor expansion of the log-likelihood. We argue that for series such as stock returns, which exhibit fairly frequent and extreme outliers, filters based on this first-order approximation can easily break down. However, an APF based on the much more rarely used second-order approximation appears to perform well in these circumstances. To detach the issue of algorithm design from problems related to model misspecification and parameter estimation, we demonstrate the lack of robustness of the first-order approximation and the feasibility of a specific second-order approximation using simulated data.

Item Type:	Journal Article
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences Q Science > QA Mathematics
Divisions:	Faculty of Science > Statistics
Journal or Publication Title:	Journal of Business & Economic Statistics
Publisher:	Routledge
ISSN:	0735-0015
Official Date:	1 January 2012
Dates:	Date Event 1 January 2012 Published
Volume:	Volume 24
Number:	Number 3
Number of Pages:	9
Page Range:	pp. 329-337
DOI:	10.1198/073500105000000199
Status:	Peer Reviewed
Publication Status:	Published
Access rights to Published version:	Restricted or Subscription Access

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