Correlation Estimation in Hybrid Systems
نویسندگان
چکیده
A simple method is proposed to estimate the instantaneous correlations between state variables in a hybrid system from empirical observable market quantities such as spot rates, stock prices and implied volatilities. The new algorithm extremely fast since only low-dimension linear systems are involved. If resulting matrix not positive semidefinite, shrinking method, which requires bisection-style iterations, recommended convert semidefinite. square of short-term at-the-money volatility suggested proxy for unobservable stochastic variance. When available, trick provided fill missing correlations. Numerical study shows that estimates reasonably accurate, when using more than 1000 data points. In addition, robust misspecified interest rate model parameters short-sampling-period assumption. G2++ Heston used illustration, but can be extended affine term-structure, local jump-diffusion models, with or without rate.
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ژورنال
عنوان ژورنال: International Journal of Theoretical and Applied Finance
سال: 2023
ISSN: ['1793-6322', '0219-0249']
DOI: https://doi.org/10.1142/s0219024923500085