Théoret, Raymond and Racicot, FrançoisÉric (2010): "Forecasting stochastic Volatility using the Kalman filter: an application to Canadian Interest Rates and PriceEarnings Ratio". Published in: Aestimatio. The IEB International Journal of Finance No. 1 (December 2010): pp. 120.

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Abstract
In this paper, we aim at forecasting the stochastic volatility of key financial market variables with the Kalman filter using stochastic models developed by Taylor (1986,1994) and Nelson (1990). First, we compare a stochastic volatility model relying on the Kalman filter to the conditional volatility estimated with the GARCH model. We apply our models to Canadian shortterm interest rates. When comparing the profile of the interest rate stochastic volatility to the conditional one, we find that the omission of a constant term in the stochastic volatility model might have a perverse effect leading to a scaling problem, a problem often overlooked in the literature. Stochastic volatility seems to be a better forecasting tool than GARCH(1,1) since it is less conditioned by autoregressive past information. Second, we filter the S&P500 priceearnings(P/E) ratio in order to forecast its value. To make this forecast, we postulate a rational expectations process but our method may accommodate other data generating processes. We find that our forecast is close to a GARCH(1,1) profile.
Item Type:  MPRA Paper 

Original Title:  "Forecasting stochastic Volatility using the Kalman filter: an application to Canadian Interest Rates and PriceEarnings Ratio" 
English Title:  "Forecasting stochastic Volatility using the Kalman filter: An Application to Canadian Interest Rates and PriceEarnings Ratio" 
Language:  English 
Keywords:  Stochastic volatility, Kalman filter, P/E ratio forecast, Interest rate forecast 
Subjects:  C  Mathematical and Quantitative Methods > C1  Econometric and Statistical Methods and Methodology: General > C13  Estimation: General G  Financial Economics > G1  General Financial Markets > G12  Asset Pricing ; Trading Volume ; Bond Interest Rates G  Financial Economics > G3  Corporate Finance and Governance > G31  Capital Budgeting ; Fixed Investment and Inventory Studies ; Capacity C  Mathematical and Quantitative Methods > C1  Econometric and Statistical Methods and Methodology: General > C19  Other C  Mathematical and Quantitative Methods > C4  Econometric and Statistical Methods: Special Topics > C49  Other 
Item ID:  35911 
Depositing User:  IEB Research Department 
Date Deposited:  17. Jan 2012 07:20 
Last Modified:  24. Mar 2015 19:41 
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URI:  https://mpra.ub.unimuenchen.de/id/eprint/35911 