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Bayesian Model Selection Via Filtering For A Class Of Micro-Movement Models Of Asset Price

Author

Listed:
  • MICHAEL A. KOURITZIN

    (Department of Mathematical and Statistical Sciences, University of Alberta, Edmonton, Alberta T6G 2G1, Canada)

  • YONG ZENG

    (Department of Mathematics and Statistics, University of Missouri at Kansas City, Kansas City, MO 64110, USA)

Abstract

This paper develops the Bayesian model selection based on Bayes factor for a rich class of partially-observed micro-movement models of asset price. We focus on one recursive algorithm to calculate the Bayes factors, first deriving the system of SDEs for them and then applying the Markov chain approximation method to yield a recursive algorithm. We prove the consistency (or robustness) of the recursive algorithm. To illustrate the construction of such a recursive algorithm, we consider a model selection problem for two micro-movement models with and without stochastic volatility, and provide simulation and real-data examples to demonstrate the effectiveness of the Bayes factor in the model selection for this class of models.

Suggested Citation

  • Michael A. Kouritzin & Yong Zeng, 2005. "Bayesian Model Selection Via Filtering For A Class Of Micro-Movement Models Of Asset Price," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 8(01), pages 97-121.
  • Handle: RePEc:wsi:ijtafx:v:08:y:2005:i:01:n:s0219024905002883
    DOI: 10.1142/S0219024905002883
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    Citations

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    Cited by:

    1. Michael A. Kouritzin, 2016. "Explicit Heston Solutions and Stochastic Approximation for Path-dependent Option Pricing," Papers 1608.02028, arXiv.org, revised Apr 2018.
    2. Kouritzin, Michael A., 2017. "Residual and stratified branching particle filters," Computational Statistics & Data Analysis, Elsevier, vol. 111(C), pages 145-165.
    3. Michael A. Kouritzin, 2018. "Explicit Heston Solutions And Stochastic Approximation For Path-Dependent Option Pricing," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 21(01), pages 1-45, February.
    4. Zhiqiang Li & Jie Xiong, 2015. "Stability of the filter with Poisson observations," Statistical Inference for Stochastic Processes, Springer, vol. 18(3), pages 293-313, October.

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