Modeling and asset allocation for financial markets based on a discrete time microstructure model |
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Authors: | Hui Peng Tohru Ozaki Valerie Haggan-Ozaki |
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Institution: | (1) College of Information Science and Engineering, Central South University, Changsha 410083, PR China, CN;(2) The Institute of Statistical Mathematics, 4-6-7 Minami Azabu, Minato-ku, Tokyo 106-8569, Japan, JP;(3) Sophia University, 4, Yonbancho, Chiyoda-ku, Tokyo 102-0081, Japan, JP |
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Abstract: | On the basis of the market microstructure theory and the continuous time stochastic volatility-style microstructure model,
a discrete time stochastic volatility microstructure model with state-observability is proposed for describing the dynamics
of financial markets. From the discrete time microstructure model proposed, estimates of two immeasurable state variables
representing the market excess demand and liquidity respectively may be obtained. A simple trading strategy for dynamic asset
allocation, based on the indirectly obtained excess demand information instead of the prediction for price, is presented.
An approach to the estimation of the discrete time microstructure model using the extended Kalman filter and the maximum likelihood
method is also presented. Case studies on financial market modeling and the estimated model-based asset dynamic allocation
control for the JPY/USD (Japanese Yen/US Dollar) exchange rate and Japan TOPIX (TOkyo stock Price IndeX) show satisfactory
modeling precision and control performance.
Received 11 March 2002 / Received in final form 4 November 2002 Published online 4 February 2003
RID="a"
ID="a"Currently a visiting researcher at the Institute of Statistical Mathematics, 4-6-7 Minami Azabu, Minato-ku, Tokyo 106-8569,
Japan e-mail: peng@ism.ac.jp |
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Keywords: | PACS 89 65 Gh Economics business and financial markets |
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