Filtering in Finance.

In this article we present an introduction to various Filtering algorithms and some of their applications to the world of Quantitative Finance. We shall first mention the fundamental case of Gaussian noises where we obtain the well-known Kalman Filter. Because of common nonlinearities, we will be discussing the Extended Kalman Filter.Commodity Prices; Term Structure; Stock Prices; Kalman Filter;

Variational Gaussian filtering via Wasserstein gradient flows

In this article, we present a variational approach to Gaussian and mixture-of-Gaussians assumed filtering. Our method relies on an approximation stemming from the gradient-flow representations of a Kullback--Leibler discrepancy minimization. We outline the general method and show its competitiveness in parameter estimation and posterior representation for two models for which Gaussian approximations typically fail: a multiplicative noise and a multi-modal model.Comment: 5 pages, 2 figures, double colum

Approximate Gaussian conjugacy: parametric recursive filtering under nonlinearity, multimodality, uncertainty, and constraint, and beyond

Since the landmark work of R. E. Kalman in the 1960s, considerable efforts have been devoted to time series state space models for a large variety of dynamic estimation problems. In particular, parametric filters that seek analytical estimates based on a closed-form Markov–Bayes recursion, e.g., recursion from a Gaussian or Gaussian mixture (GM) prior to a Gaussian/GM posterior (termed ‘Gaussian conjugacy’ in this paper), form the backbone for a general time series filter design. Due to challenges arising from nonlinearity, multimodality (including target maneuver), intractable uncertainties (such as unknown inputs and/or non-Gaussian noises) and constraints (including circular quantities), etc., new theories, algorithms, and technologies have been developed continuously to maintain such a conjugacy, or to approximate it as close as possible. They had contributed in large part to the prospective developments of time series parametric filters in the last six decades. In this paper, we review the state of the art in distinctive categories and highlight some insights that may otherwise be easily overlooked. In particular, specific attention is paid to nonlinear systems with an informative observation, multimodal systems including Gaussian mixture posterior and maneuvers, and intractable unknown inputs and constraints, to fill some gaps in existing reviews and surveys. In addition, we provide some new thoughts on alternatives to the first-order Markov transition model and on filter evaluation with regard to computing complexity

Iterative State Estimation in Non-linear Dynamical Systems Using Approximate Expectation Propagation

Bayesian inference in non-linear dynamical systems seeks to find good posterior approximations of a latent state given a sequence of observations. Gaussian filters and smoothers, including the (extended/unscented) Kalman filter/smoother, which are commonly used in engineering applications, yield Gaussian posteriors on the latent state. While they are computationally efficient, they are often criticised for their crude approximation of the posterior state distribution. In this paper, we address this criticism by proposing a message passing scheme for iterative state estimation in non-linear dynamical systems, which yields more informative (Gaussian) posteriors on the latent states. Our message passing scheme is based on expectation propagation (EP). We prove that classical Rauch--Tung--Striebel (RTS) smoothers, such as the extended Kalman smoother (EKS) or the unscented Kalman smoother (UKS), are special cases of our message passing scheme. Running the message passing scheme more than once can lead to significant improvements of the classical RTS smoothers, so that more informative state estimates can be obtained. We address potential convergence issues of EP by generalising our state estimation framework to damped updates and the consideration of general alpha-divergences

State Estimation with Unconventional and Networked Measurements

This dissertation consists of two main parts. One is about state estimation with two types of unconventional measurements and the other is about two types of network-induced state estimation problems. The two types of unconventional measurements considered are noise-free measurements and set measurements. State estimation with them has numerous real supports. For state estimation with noisy and noise-free measurements, two sequential forms of the batch linear minimum mean-squared error (LMMSE) estimator are obtained to reduce the computational complexity. Inspired by the estimation with quantized measurements developed by Curry [28], under a Gaussian assumption, the minimum mean-squared error (MMSE) state estimator with point measurements and set measurements of any shape is proposed by discretizing continuous set measurements. State estimation under constraints, which are special cases of the more general framework, has some interesting properties. It is found that under certain conditions, although constraints are indispensable in the evolution of the state, update by treating them as measurements is redundant in filtering. The two types of network-induced estimation problems considered are optimal state estimation in the presence of multiple packet dropouts and optimal distributed estimation fusion with transformed data. An alternative form of LMMSE estimation in the presence of multiple packet dropouts, which can overcome the shortcomings of two existing ones, is proposed first. Then under a Gaussian assumption, the MMSE estimation is also obtained based on a hard decision by comparing the measurements at two consecutive time instants. It is pointed out that if this comparison is legitimate, our simple MMSE solution largely nullifies existing work on this problem. By taking linear transformation of the raw measurements received by each sensor, two optimal distributed fusion algorithms are proposed. In terms of optimality, communication and computational requirements, three nice properties make them attractive

State Estimation with Unconventional and Networked Measurements

This dissertation consists of two main parts. One is about state estimation with two types of unconventional measurements and the other is about two types of network-induced state estimation problems. The two types of unconventional measurements considered are noise-free measurements and set measurements. State estimation with them has numerous real supports. For state estimation with noisy and noise-free measurements, two sequential forms of the batch linear minimum mean-squared error (LMMSE) estimator are obtained to reduce the computational complexity. Inspired by the estimation with quantized measurements developed by Curry [28], under a Gaussian assumption, the minimum mean-squared error (MMSE) state estimator with point measurements and set measurements of any shape is proposed by discretizing continuous set measurements. State estimation under constraints, which are special cases of the more general framework, has some interesting properties. It is found that under certain conditions, although constraints are indispensable in the evolution of the state, update by treating them as measurements is redundant in filtering. The two types of network-induced estimation problems considered are optimal state estimation in the presence of multiple packet dropouts and optimal distributed estimation fusion with transformed data. An alternative form of LMMSE estimation in the presence of multiple packet dropouts, which can overcome the shortcomings of two existing ones, is proposed first. Then under a Gaussian assumption, the MMSE estimation is also obtained based on a hard decision by comparing the measurements at two consecutive time instants. It is pointed out that if this comparison is legitimate, our simple MMSE solution largely nullifies existing work on this problem. By taking linear transformation of the raw measurements received by each sensor, two optimal distributed fusion algorithms are proposed. In terms of optimality, communication and computational requirements, three nice properties make them attractive