Likelihood Estimation of Jump-Diffusions

Transcription

1 Likelihood Estimation of Jump-Diffusions Extensions from Diffusions to Jump-Diffusions, Implementation with Automatic Differentiation, and Applications Berent Ånund Strømnes Lunde DEPARTMENT OF MATHEMATICS Aktuarfokus, February , Oslo

2 Outline 1 Motivation, Problem, and Solution 2 Approximation methods for small-time jump-diffusion transition densities 3 Numerical results 4 Implementation 5 Applications Analysis of stock prices as nonlinear processes Stochastic volatility models A short rate model Likelihood Estimation of Jump-Diffusions B. Lunde AKTUARFOKUS 2 / 24

3 Motivation Hang Seng Index Closing Prices Close Date How does financial bubbles develop? Likelihood Estimation of Jump-Diffusions B. Lunde AKTUARFOKUS 3 / 24

4 The problem 250 Underlying jump diffusion process Observations 200 Value Time Continuous time process with an infinitesimal description dx t = µ(t, X t )dt + σ(t, X t )dw t + c(t, X t, ξ Nt +1)dN t, (1) but discrete observations. How to find the transition density to build the (log)likelihood: l(θ x t1,..., x tn ) = n log p(x ti x ti 1, θ)? (2) i=2 Likelihood Estimation of Jump-Diffusions B. Lunde AKTUARFOKUS 4 / 24

5 The solution Replace the continuous process with a discrete approximation where it is possible to find the transition density. The method of Preston & Wood 2012 for time-homogeneous diffusions: 1 Develop an Itô-Taylor expansion of the sample path. 2 Calculate the moment generating function of the retained terms in the expansion. 3 Approximate the inverse Fourier transform f (x) = 1 φ(s)e isx ds. (3) 2π We extended this method to make it applicable to time-homogeneous jump-diffusions of the following form: dx t = µ(x t )dt + σ(x t )dw t + c(ξ Nt +1)dN t. (4) Likelihood Estimation of Jump-Diffusions B. Lunde AKTUARFOKUS 5 / 24

6 ITSPA Let X t be a jump-diffusion, where Y t = N t i=1 Z i, and let X t denote the approximate solution to the pure diffusion, based on a discretization scheme. Theorem (ITSPA) An approximation to the transition density of X t follows from the saddlepoint approximation to the transition density of the approximated process X t = X t + Y t, which we call the Itô-Taylor saddlepoint approximation: } where ( ) f Xt (x) spa f X t ; x = { exp K X t (ŝ) ŝx 2πK (ŝ) X t, (5) K X t (ŝ) = K X t (ŝ) + K Y t (ŝ) = K X t (ŝ) + λt (M Z 1), (6) and M Z is the MGF of the iid jump magnitudes and ŝ the saddlepoint. Likelihood Estimation of Jump-Diffusions B. Lunde AKTUARFOKUS 6 / 24

7 mitspa Theorem The Itô-Taylor saddlepoint approximation mixture (mitspa) to the transition density of X t is as follows: ( ) ) ( ) ( mspa f X t ; x = spa (f Xt ; x e λt + spa f X ; x 1 e λt), (7) t where X t = X t + Nt i=1 Z i, and Nt has a zero-truncated Poisson distribution with intensity λt and defined by Nt = N t N t > 0. The related CGF of the compounded zero-truncated Poisson process Y is given by: ( ) ( K Y (s) = λt (M Z (s) 1) + log 1 e λtm Z(s) log 1 e λt). (8) Likelihood Estimation of Jump-Diffusions B. Lunde AKTUARFOKUS 7 / 24

8 Fourier-Gauss-Laguerre Theorem (Fourier-Gauss-Laguerre) The Fourier-Gauss-Laguerre (FGL) approximation to the transition density of X t is given by: ( ) fgl f X t ; x = 1 π n j=1 ( ) w j R φ X t (s j )e s j is j x, (9) where w j and s j are the weights and the abscissa respectively in the Gauss-Laguerre method of order n. The characteristic function is found by multiplying the characteristic function for one of the discretizations X t of the diffusion part and the characteristic function for the compounded Poisson process Y t : φ X t (s) = φ X t (s)φ Y t (s). (10) Likelihood Estimation of Jump-Diffusions B. Lunde AKTUARFOKUS 8 / 24

9 The Cox-Ingersoll-Ross process density Exact Spa 1 Spa 2 respa 2 FGL 2 SPA 3 respa 3 FGL 3 density Exact Spa 1 Spa 2 respa 2 FGL 2 SPA 3 respa 3 FGL x x AELD 10 2 AELD x x Likelihood Estimation of Jump-Diffusions B. Lunde AKTUARFOKUS 9 / 24

10 The Merton jump-diffusion FGL Spamix respamix Spa respa FGL Spamix respamix Spa respa 2.0 Density 10 Density x x AELD AELD x x Likelihood Estimation of Jump-Diffusions B. Lunde AKTUARFOKUS 10 / 24

11 Results from MLE Results from likelihood-based inference for processes with known solutions (GBM, OU, CIR, MJD). For pure diffusions: All the methods and schemes produce good results compared to the estimates based on using the exact transition densities. Renormalization does not seem to have a large and beneficial effect. The saddlepoint approximation approximates the transition density accurately. For jump-diffusions: Renormalization of the mitspa seems to be necessary both for parameter estimates and especially the value of the likelihood. Likelihood Estimation of Jump-Diffusions B. Lunde AKTUARFOKUS 11 / 24

12 A note on speed Method l θ θ l H θ CIR ITSPA scheme scheme scheme reitspa scheme scheme FGL scheme scheme MJD mitspa remitspa FGL Likelihood Estimation of Jump-Diffusions B. Lunde AKTUARFOKUS 12 / 24

13 Automatic differentiation and TMB Implementation with automatic differentiation (AD) using the TMB package for R and C++. Given a computer algorithm defining a function, AD is a set of techniques used to evaluate numerically the derivatives of that function. Based on the property of programming languages such as C++ of decomposing expressions into elementary operations. Can be implemented using operator overloading. R Controlling Session *.R file Data and arguments Plot results CppAD External package Derivative calculations C++ Obj. Func. *.cpp file Evaluate likelihood, gradient and Hessian Eigen External package Matrix library Likelihood Estimation of Jump-Diffusions B. Lunde AKTUARFOKUS 13 / 24

14 Benefits and extensions It is possible to utilize AD inside the C++ part of the program: 1 Evaluation of K X (ŝ) in the expression of the saddlepoint approximation. 2 Makes it possible to solve the inner problem: K X (ŝ) = x. 3 Comes in handy when calculating moments which was needed for renormalization. We extended TMB with the following: 1 Modified Bessel function of the first kind (drawn from R). 2 Log-normal density function (drawn from R). 3 A templated complex data type, ctype. Likelihood Estimation of Jump-Diffusions B. Lunde AKTUARFOKUS 14 / 24

15 Complexity of methods ITSPA GL X0, s, θ KXt(s) wj, sj X0, Xt, s, θ CGF f = KXt(s) sx FGL f = KXt(s) sx, s KXt(s) X0, θ arg mins {KXt(s) sx} X0, sj, θ φxt(sj) KXt(s), ŝ, Xt IP SPA CF SP SPA Likelihood Estimation of Jump-Diffusions B. Lunde AKTUARFOKUS 15 / 24

16 Conclusion on methods For diffusion processes, we suggest using the ITSPA methods on the basis of stability and speed. For jump-diffusions, we suggest using the FGL method on the basis of accuracy, stability and speed. Likelihood Estimation of Jump-Diffusions B. Lunde AKTUARFOKUS 16 / 24

17 Application: Analysis of stock prices as nonlinear processes Applied the (ITSPA and FGL) methods to the question of nonlinearity and jumps as significant additions to stock price models. Model name Drift component Diffusion component Jump component GBM rs t σs t None CEV rs t σst α None nlmodel 1 rst α σst α None nlmodel 2 rst α σst β None MJD (r λˆk)s t σs t Log-normal CEVJD (r λˆk)s t σst α Log-normal Likelihood Estimation of Jump-Diffusions B. Lunde AKTUARFOKUS 17 / 24

18 Results on nonlinearity and jumps Using daily logarithmic stock quotes 1 Shanghai Securities Exchange (SSE) from until Dow Jones Industrial Average (DJIA) from until Standard & Poors 500 (S&P500) from until Both the addition of nonlinearity and of jumps are significant improvements. The α parameter in nlmodel 2 is not a significant addition to the model. The CEVJD model is a significant improvement relative to the MJD model. Likelihood Estimation of Jump-Diffusions B. Lunde AKTUARFOKUS 18 / 24

19 SSE MLE results Model Parameters Statistics r σ α β λ µ ν l(ˆθ; x) D p-value SSE bubble of 07 GBM est se CEV est se nlmodel 1 est se nlmodel 2 est se MJD est se CEVJD est se Likelihood Estimation of Jump-Diffusions B. Lunde AKTUARFOKUS 19 / 24

20 Application: stochastic volatility models Which stochastic volatility model is preferable? Transformed VIX indices from January 1990 to March 2016 as observations of implied volatility. Used the ITSPA with the Euler scheme (due to stability). S&P VIX Scaled VIX Scaled VIX VIX S&P Likelihood Estimation of Jump-Diffusions B. Lunde AKTUARFOKUS 20 / 24

21 The results on stochastic volatility models Model Estimates Statistic Name Drift Diffusion κ α σ δ l(ˆθ, x) OU κ(α V t ) σ est se CIR κ(α V t ) σ V t est se GARCH(1,1) κ(α V t ) σv t est se /2 model V t (α κv t ) σv 3 2 t est se GMR κ(α V t ) σvt δ est se Of the standard models, the continuous time GARCH(1,1) model seems preferable. Likelihood Estimation of Jump-Diffusions B. Lunde AKTUARFOKUS 21 / 24

22 Application: A short-rate model 12 variable Nibor3mnd Swap10yr 9 Swap1yr Swap2yr value 6 Swap3yr Swap4yr Swap5yr Swap6yr 3 Swap7yr Swap8yr Swap9yr Dato dr t = κ(α r t )dt + σr δ t dw t + Y t dn t κ α σ δ λ µ ν Likelihood Estimation of Jump-Diffusions B. Lunde AKTUARFOKUS 22 / 24

23 Further work 1 An extension of the mitspa and the FGL methods to several dimensions. 2 An extension of the methods to a more general jump-diffusion process, where the jump part of the SDE may be allowed to take a more general form. 3 A more extensive study of nonlinearity in financial markets. 4 The study of a more general mean reverting jump-diffusion process as a model for stochastic volatility, an extension of the basic affine jump-diffusion process. E.g: dv t = κ(α V t )dt + σv δ t dw t + dj t, (11) where J t is a compounded Poisson process with gamma distributed jumps. Likelihood Estimation of Jump-Diffusions B. Lunde AKTUARFOKUS 23 / 24

24 Thank you Likelihood Estimation of Jump-Diffusions B. Lunde AKTUARFOKUS 24 / 24