Parameter Estimation for the Stochastic Volatility Model using the EM Algorithm

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Thanapat Iamtan
Tanit Malakorn


This paper presents the application of the EM algorithm in estimating the parameters of the stochastic volatility model.  The experimental results showed that the parameters computed by the Monte Carlo method and by the Kalman method in the EM algorithm are slightly different at the 0.05 significance level compared to the true parameters.  We then applied the EM algorithm with the Monte Carlo method to estimate the parameters of the stochastic volatility model using 5 foreign exchange rates as a case study. The proper model can be used to forecast the volatility of the foreign exchange rate which is one major variable in calculating the value of the options having the exchange rate as an underlying asset.

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Iamtan, T., & Malakorn, T. (2016). Parameter Estimation for the Stochastic Volatility Model using the EM Algorithm. Naresuan University Engineering Journal, 11(2), 1–7.
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Thailand Futures Exchange. [Online]. Available:

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