Wang, Ren-Her, Aston, John A. D. and Fuh, Cheng-Der. (2010) The role of additional information in option pricing: estimation issues for the state space model. Computational Economics, Vol.36 (No.4). pp. 283-307. ISSN 0927-7099

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Abstract

We consider two competing financial state space models and investigate whether additional information in the form of option price data is helpful to the estimation of either the unobservable state variable (volatility) or the unknown parameters in the model. The complete discussion of the estimation problem in the presence of additional information involves decisions about filtering methods, the quality of the new information, the correlation between state variables and out-of-sample forecast performance. It is found that the state variable estimation is more sensitive than the parameter estimation to the correlation, information quality and the assumed linearity or non-linearity of the underlying model. As a result of the investigation of these factors, the particle filter is shown to be an attractive method for computing posterior distributions for these models.

Item Type:	Journal Article
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management Q Science > QA Mathematics
Divisions:	Faculty of Science > Statistics
Journal or Publication Title:	Computational Economics
Publisher:	Springer New York LLC
ISSN:	0927-7099
Date:	December 2010
Volume:	Vol.36
Number:	No.4
Number of Pages:	25
Page Range:	pp. 283-307
Identification Number:	10.1007/s10614-010-9240-0
Status:	Peer Reviewed
Publication Status:	Published
Access rights to Published version:	Restricted or Subscription Access
URI:	http://wrap.warwick.ac.uk/id/eprint/4940

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