The State-Space Model for the Double Heston Model written on two underlying assets

Abstract

In this study, we look at the derivation of the state space model that is applied in non-linear filtering methods. The state-space model is for the double Heston Model written on two underlying assets. The non-linear filtering methods include unscented Kalman filter, extended Kalman filter and particle filter. This study extends work of Namundjebo (2016) who looked at the application of non-linear filtering methods to the Double Heston Model. We extend this work to the derivation of the state space model of the Double Heston Model with two underlying assets. The two underlying assets are assumed to be uncorrelated.

Keywords: non-linear filtering, unscented Kalman filter, extended Kalman filter, Kalman filter, particle filter, state-space model.