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A Component GARCH Model with Time Varying Weights

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  • Bauwens Luc

    ()
    (CORE and Université Catholique de Louvain)

  • Storti Giuseppe

    ()
    (University of Salerno)

Abstract

We present a novel GARCH model that accounts for time varying, state dependent, persistence in the volatility dynamics. The proposed model generalizes the component GARCH model of Ding and Granger (1996). The volatility is modelled as a convex combination of unobserved GARCH components where the combination weights are time varying as a function of appropriately chosen state variables. In order to make inference on the model parameters, we develop a Gibbs sampling algorithm. Adopting a fully Bayesian approach allows to easily obtain medium and long term predictions of relevant risk measures such as value at risk. Finally we discuss the results of an application to a series of daily returns on the S&P500.

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Bibliographic Info

Article provided by De Gruyter in its journal Studies in Nonlinear Dynamics & Econometrics.

Volume (Year): 13 (2009)
Issue (Month): 2 (May)
Pages: 1-33

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Handle: RePEc:bpj:sndecm:v:13:y:2009:i:2:n:1

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  1. Carlo Acerbi & Dirk Tasche, 2001. "On the coherence of Expected Shortfall," Papers cond-mat/0104295, arXiv.org, revised May 2002.
  2. Markus Haas, 2004. "A New Approach to Markov-Switching GARCH Models," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 2(4), pages 493-530.
  3. BAUWENS, Luc & LAURENT, Sébastien, 2002. "A new class of multivariate skew densities, with application to GARCH models," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 2002020, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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  6. Luc Bauwens & Michel Lubrano, 1998. "Bayesian inference on GARCH models using the Gibbs sampler," Econometrics Journal, Royal Economic Society, Royal Economic Society, vol. 1(Conferenc), pages C23-C46.
  7. Michel LUBRANO, 2001. "Smooth Transition Garch Models : a Baysian Perspective," Discussion Papers (REL - Recherches Economiques de Louvain) 2001032, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
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Cited by:
  1. Haas, Markus & Mittnik, Stefan & Paolella, Marc S., 2008. "Asymmetric multivariate normal mixture GARCH," CFS Working Paper Series 2008/07, Center for Financial Studies (CFS).
  2. Stefano Grassi & Paolo Santucci de Magistris, 2013. "It’s all about volatility (of volatility): evidence from a two-factor stochastic volatility model," CREATES Research Papers 2013-03, School of Economics and Management, University of Aarhus.
  3. BAUWENS, Luc & HAFNER, Christian & LAURENT, Sébastien, 2011. "Volatility models," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 2011058, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. bauwens, Luc & hafner, Christian & pierret, Diane, 2011. "Multivariate volatility modeling of electricity futures," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 2011011, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. Bouoiyour, Jamal & Selmi, Refk, 2013. "Nonlinearities and the nexus between inflation and inflation uncertainty in Egypt: New evidence from wavelets transform framework," MPRA Paper 52414, University Library of Munich, Germany.
  6. Jamal Bouoiyour & Refk Selmi, 2014. "Commodity price uncertainty and manufactured exports in Morocco and Tunisia: Some insights from a novel GARCH model," Economics Bulletin, AccessEcon, vol. 34(1), pages 220-233.
  7. Boudt, Kris & Daníelsson, Jón & Laurent, Sébastien, 2013. "Robust forecasting of dynamic conditional correlation GARCH models," International Journal of Forecasting, Elsevier, Elsevier, vol. 29(2), pages 244-257.
  8. Bouoiyour, Jamal & Selmi, Refk, 2013. "The controversial link between exchange rate volatility and exports: Evidence from Tunisian case," MPRA Paper 49133, University Library of Munich, Germany, revised Mar 2013.
  9. Hossein Asgharian & Charlotte Christiansen & Ai Jun Hou, 2014. "Macro-Finance Determinants of the Long-Run Stock-Bond Correlation: The DCC-MIDAS Specification," CREATES Research Papers 2014-13, School of Economics and Management, University of Aarhus.

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