Fuertes, Carlos; Papanicolaou, Andrew - In: Applied Mathematical Finance 21 (2014) 6, pp. 483-522
We formulate and analyse an inverse problem using derivative prices to obtain an implied filtering density on volatility's hidden state. Stochastic volatility is the unobserved state in a hidden Markov model (HMM) and can be tracked using Bayesian filtering. However, derivative data can be...