Second Order Filter Distribution Approximations for Financial Time Series with Extreme Outlier



J.Q. Smith and Antonio Santos

simplified,

2       2   7           2        ..2 2       ..2 2 __ ..2 X

/ I *           α   αt  ( 1  I αt ʌ  , μt,k  , μt,k    μt,k ʌ                 ∕qo

g(y⅛) = exp (j-2- (41 + yy) +   .        .                  ( )

After sampling k from a distribution proportional to (32), the particle αt-1,k is
chosen, and the density, assuming the role of prior density, assumes a Gaussian form
with mean
μt,k = φαt- 1 ,k and variance σiη. This is combined with a Gaussian density
with mean
αt2 and variance σ2 =2. The approximating density thus becomes:

g (αtlαt- 1 ,k, α2) = Я μkkt,k}

(33)


where

2
μt,k


2 μt,k + σηα2


2 + σ2η


(34)


and

2
σt,k


(35)

After the particles have been sampled, they must be resampled in order to take into

account the target density. They are resampled using the second stage weights

log wj =


πt,j =


αtj

2

wj


y2    + α,j

2β2 exp (αt,j )


22
t2 )


(36)


m,
j=1 wj


j=1,...,m


(37)


Following the resampling stage, an approximation of the target posterior distribution
of the states at
t is available, which will be used as a prior distribution to update
the states at
t + 1.

To summarize, the particles at t - 1 propagated to update the distribution of
the states at
t are chosen randomly according to the weights defined in (32). These
weights are influenced by the information contained in
yt . By conditioning on each
particle chosen through the first stage weights, new particles are sampled. As these
come from an approximating distribution, a second step is necessary. The particles
are resampled using the weights defined in (36)-(37). Our modification, outlined
above, makes this second order APF straightforward and quick to implement.

G.E.M.F - F.E.U.C.

13




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