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Estimating doubly stochastic Poisson process with affine intensities by Kalman filter


This paper proposes a Kalman filter formulation for parameter estimation of doubly stochastic Poisson processes (DSPP) with stochastic affine intensities. To achieve this aim, an analytical expression for the probability distribution functions of the corresponding DSPP for any intensity from the class of affine diffusions is obtained. More detailed results are provided for one- and two-factor Feller and Ornstein–Uhlenbeck diffusions. A Monte Carlo study indicates that the proposed method is a reliable procedure for moderate sample sizes. An empirical analysis of one- and two-factor Feller and Ornstein–Uhlenbeck models is carried out using high frequency transaction data.

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  1. In “Appendix 3” we outline, based on Albanese and Lawi (2004), the class of diffusions whose Laplace Transform exists.

  2. A stiff equation is a differential equation for which certain numerical methods for solving the equation are numerically unstable, unless the step size is taken to be extremely small. It has proven difficult to formulate a precise definition of stiffness, but the main idea is that the equation includes some terms that can lead to rapid variation in the solution.

  3. The estimation procedure and the Kalman filter algorithm were implemented in this work in accordance with Bolder (2001)

  4. We have described the intensity by \(\lambda (\mathbf X(t))\) as a way to make explicit the role played by the state variable \(X(t)\), now we simplify this cumbersome notation to \(\lambda (t)\).

  5. A comparison among different approximation to the non-central chi-square can be found at Johnson and Kotz (1970).

  6. BM&FBOVESPA is the fourth largest exchange in the word in terms of market capitalization. This exchange has a vertically integrated business model with a trade platform and clearing for equities, derivatives and cash market for currency, government and private bonds.

  7. Ticker: FUT DOLX08.

  8. Here # stands for the number of arrivals within the given time interval.

  9. Definition and properties of the trust-region-reflective algorithm can be found in Byrd (1987).

  10. Generally speaking, two models, say \(H_f\) and \(H_g\), are said to be non-nested if it is not possible to derive \(H_f\) (or \(H_g\)) from the other model either by means of exact set of parametric restrictions or as a result of a limiting process.


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Alan De Genaro would like to thank Marco Avellaneda, Jorge Zubelli, Cristiano Fernandes, Julio Stern, Peter Carr, Cris Rogers, Jean Pierre Fouque and seminar participants at NYU-Courant, IMPA, FEA/USP, SUNY—Stony Brook for helpful comments. We also thank the three reviewers for their thorough review and highly appreciate the comments and suggestions, which significantly contributed to improving the quality of this paper. A special thank is due to Yuri Suhov for his invaluable suggestions.

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Correspondence to Alan De Genaro.

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An earlier version of this paper circulated under the title doubly stochastic Poisson processes with affine intensities. The results of this paper are part of the first author’s Ph.D Thesis completed under supervision of the second author.


Appendix 1: Proof of Result 2

To convey the spirit of proofs used for this kind of results, we give here a short demonstration. Substituting the form of processes \(\mathbf X(t)\), \({t \ge 0}\), and \(\lambda (t)\), \({t \ge 0}\), as in (3) and (2), we obtain:

$$\begin{aligned} \begin{array}{l} \displaystyle 0=-(\rho _0+\varvec{\rho } \cdot \mathbf {X}(t))F(\mathbf x,\,t) +\frac{\partial F(\mathbf x,\,t)}{\partial t}\\ \displaystyle \qquad +\frac{\partial F(\mathbf x\,t)}{\partial \mathbf x}(\mathbf {K_0}+ \mathbf {K_1}\cdot \mathbf {X}(t)) + \frac{1}{2}\sum _{i,j}\frac{\partial ^2F(\mathbf x,\,t)}{\partial x_i\partial x_j}(a_{ij}+b_{ij}\cdot \mathbf {X}(t)). \end{array} \end{aligned}$$

Inserting \(F(\mathbf x,t)=e^{\alpha (t)+\beta (t)\cdot \mathbf x}\) into the PDE above and grouping the terms in \(\mathbf x\):

$$\begin{aligned} u(\cdot )\mathbf x+v(\cdot )=0 \end{aligned}$$


$$\begin{aligned} u(\cdot )&= -\beta ^\shortmid (t)+\rho _1-\mathbf {K_1}^\top \beta (t)-\frac{1}{2}\beta (t)^\top \mathbf {b} \beta (t) \end{aligned}$$
$$\begin{aligned} v(\cdot )&=\alpha ^\shortmid (t)+\rho _0-\mathbf {K_0}\beta (t)-\frac{1}{2}\beta (t)^\top \mathbf {a} \beta (t) \end{aligned}$$

Use the separation of variable technique to obtain that \(\alpha \) and \(\beta \) satisfy a Ricatti equation with boundary condition \(\alpha (0)=0\) and \(\beta (0)=0\). \(\square \)

Appendix 2: Proof of Corollary 1 and 2

To obtain in a closed-form the PDF of a DSPP with a given affine intensity, we need from Theorem 1 to solve:

$$\begin{aligned} \left\{ \begin{array}{ccccccc} 0&{}= &{}-\beta ^\shortmid (t)&{} + &{}\rho _1-\mathbf {K_1}^\top \beta (t)&{}-&{}\frac{1}{2}\beta (t)^\top \mathbf {b} \beta (t)\\ 0&{}= &{}\alpha ^\shortmid (t)&{} + &{} \rho _0-\mathbf {K_0}\beta (t)&{}-&{}\frac{1}{2}\beta (t)^\top \mathbf {a} \beta (t) \end{array} \right. \end{aligned}$$

The exact solution for each case can be obtained after replacing the appropriate parametrization:

  1. 1.

    Feller intensity \(\mathbf {K_0} = \kappa \theta \), \(\mathbf {K_1} = -\kappa \), \(\mathbf {a} = 0\) and \(\mathbf {b} = \sigma ^2\)

  2. 2.

    O–U intensity \(\mathbf {K_0} = \kappa \theta \), \(\mathbf {K_1} = -\kappa \), \(\mathbf {a} = \sigma ^2\) and \(\mathbf {b} = 0\)

on (57) and solving a Ricatti equation for \(\alpha \) and \(\beta \) with boundary condition \(\alpha (0)=0\) e \(\beta (0)=0\).

As the multidimensional case is merely a sum of decoupled one-dimensional solutions, its derivation is identical to described above.\(\square \)

Appendix 3: Conditions to existence of Laplace transform for \(\int \limits _t^T\lambda (t){\mathrm{d}}t\)

Without going into detail of the Albanese–Lawi result, we describe below the class of (scalar) processes introduced in Albanese and Lawi (2004). It consists of diffusions \(X(t)\), \(t \ge 0\), solving the following SDE:

$$\begin{aligned} \mathrm{d} X(t) =2\frac{h'(X(t))}{h(X(t))}\frac{A(X(t))^2}{R(X(t))} \mathrm{d}t +\frac{\sqrt{2}A(X(t))}{\sqrt{R(X(t))}}\mathrm{d}W(t). \end{aligned}$$

Here \(A(x)\), \(R(x)\) and \(h(x)\) are second-order polynomials and in addition:

  1. 1.

    \(A(x)\) belongs to the set \(\{1,x,x(1-x),x^2+1\}\) and \(R(X(t))\ge 0\);

  2. 2.

    the function \(h(x)\) is a linear combination of hypergeometric functions of a confluent type \(_1F_1\) if \(A(x) \in \{1,x\}\) and of a Gaussian type \(_2F_1\) if \(A(x)\in \{x(1-x),x^2+1\}\).

A hypergeometric function in its general form may be written as

$$\begin{aligned} {}_pF_q(\alpha _1,\ldots ,\alpha _p;\gamma _1,\ldots ,\gamma _q;z). \end{aligned}$$

For \(p \le q+1, \gamma _j \in \mathbb {C}\setminus \mathbb {Z}_+\) it can be represented by using Taylor’s expansion around \(z=0\):

$$\begin{aligned} {}_pF_q(\alpha _1,\ldots ,\alpha _p;\gamma _1,\ldots ,\gamma _q;z) =\sum _0^\infty \frac{(\alpha _1)_n \cdots (\alpha _p)_n}{(\gamma _1)_n \cdots (\gamma _q)_n} \frac{z^n}{n!}\,. \end{aligned}$$

As an example of application of the Albanese–Lawi, let the intensity process \(\lambda (t)\) follows a one-dimensional Feller diffusion. To this end, assume that the polynomials \(A(x)\), \(h(x)\) and \(R(x)\) are defined as:

$$\begin{aligned} A(x)= x, \quad R(x) = \frac{2x}{\sigma ^2}, \quad h(x)=x^{a/\sigma ^2}e^{-\frac{b}{\sigma ^2}x} \end{aligned}$$

Substituting the polynomial into (58) and performing the change of parameters \(a=\kappa \theta /\sigma ^2\) and \(\kappa /\sigma ^2\) we conclude our example. \(\square \)

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De Genaro, A., Simonis, A. Estimating doubly stochastic Poisson process with affine intensities by Kalman filter. Stat Papers 56, 723–748 (2015).

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  • Doubly stochastic Poisson process
  • Affine diffusion
  • Kalman filter
  • Order book

Mathematics Subject Classification

  • 62M99
  • 62P05