A Nonlinear Threshold Model for the Dependence of Extremes of Stationary Sequences
AbstractWe propose a TAR(3,1)-GARCH(1,1) model able to describe two different types of extreme events: a first type generated by large uncertainty regimes and a second type where extremes come from isolated dread/joy events. The novelty of this model resides on the definition of the regimes, motivated by the occurrence of extreme values, and of the threshold variable, defined by the shock affecting the process one period lagged. The model is able to uncover dependence and clustering of extremes in high and low volatility periods. A Wald type test to detect nonlinearities on the conditional mean process defined by an unobservable threshold variable is introduced. In the empirical application, we find evidence of predictability for extreme returns on SPDR S&P500 fund during the recent crisis period, July 2008 to March 2011. This finding seems to support the presence of some persistence and mean reversion in the dynamics of returns after the occurrence of extreme shocks.
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Bibliographic InfoArticle provided by De Gruyter in its journal Studies in Nonlinear Dynamics & Econometrics.
Volume (Year): 16 (2012)
Issue (Month): 3 (September)
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Web page: http://www.degruyter.com
Other versions of this item:
- Martinez, O. & Olmo, J., 2008. "A Nonlinear Threshold Model for the Dependence of Extremes of Stationary Sequences," Working Papers 08/08, Department of Economics, City University London.
- Martínez Ibáñez, Oscar & Olmo, José, 2008. "A nonlinear threshold model for the dependence of extremes of stationary sequences," Working Papers 2072/5361, Universitat Rovira i Virgili, Department of Economics.
- C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
- C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
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