A new model - the factorial hidden Markov volatility (FHMV) model - is proposed for financial returns and their latent variances. It is also applicable to model directly realized variances. Volatility is modeled as a product of three components: a Markov chain driving volatility persistence, an...

The cross-section of options holds great promise for identifying return distributions and risk premia, but estimating dynamic option valuation models with latent state variables is challenging when using large option panels. We propose a particle MCMC framework with a novel filtering approach...