Bayesian estimation of a Markov-switching threshold GARCH model with Student-t innovations
| Abstract |
A Bayesian estimation of a regime-switching threshold asymmetric
GARCH model is proposed. The specification is based on a
Markov-switching model with Student-t innovations and
K separate GJR(1,1) processes whose asymmetries are located
at free non-positive threshold parameters. The model aims at
determining whether or not: (i) structural breaks are present
within the volatility dynamics; (ii) asymmetries (leverage effects)
are present, and are different between regimes and (iii) the
threshold parameters (locations of bad news) are similar between
regimes. A novel MCMC scheme is proposed which allows for a fully
automatic Bayesian estimation of the model. The presence of two
distinct volatility regimes is shown in an empirical application to
the Swiss Market Index log-returns. The posterior results indicate
no differences with regards to the asymmetries and their thresholds
when comparing highly volatile periods with the milder ones.
Comparisons with a single-regime specification indicates a better
in-sample fit and a better forecasting performance for the
Markov-switching model. |
| Keywords |
Asymmetry;Bayesian;GARCH;Markov-switching;SMI;Threshold |
| Citation | Ardia, D. (2009). Bayesian estimation of a Markov-switching threshold GARCH model with Student-t innovations. Econometrics Journal, 12(1), 105-126. |
| Type | Journal article (English) |
| Date of appearance | 2009 |
| Journal | Econometrics Journal |
| Volume | 12 |
| Issue | 1 |
| Pages | 105-126 |
| URL | http://onlinelibrary.wiley.com/doi/10.1111/j.1368-423X.20... |
| Related project | Bayesian estimation of regime-switching GARCH models |