Stochastic volatility
I have not yet seen the application of the Kalman filter (and the particle filter) to option pricing. This sounds like a very interesting approach! If anyone knows about such work, please give me a link!
Another paper that might be of interest is this by Alireza (reza) et.al http://www.wilmott.com/pdfs/050511_javaheri.pdf the kalman filter is a prefered approach for computing time-varying betas in some banks :-)