Extracting volatility signal using maximum a posteriori estimation

This paper outlines a methodology to estimate a denoised volatility signal for foreign exchange rates using a hidden Markov model (HMM). For this purpose a maximum a posteriori (MAP) estimation is performed. A double exponential prior is used for the state variable (the log-volatility) in order to allow sharp jumps in realizations and then log-returns marginal distributions with heavy tails. We consider two routes to choose the regularization and we compare our MAP estimate to realized volatility measure for three exchange rates.