Volatility estimation via hidden Markov models
AbstractIn this paper we suggest a convenient way to obtain parameter estimates of a discrete state hidden Markov volatility process within a framework consistent with observed option prices and stochastic volatility. Relative to similar proposals, we simplify the model estimation by resorting to some parametric approximation of the model in a maximum likelihood context. We show how correlation between returns and volatility innovations can be easily accommodated within this framework. Empirical applications illustrate model search strategies for the SP500 stock index, comparing the performances to a standard GARCH model.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal Journal of Empirical Finance.
Volume (Year): 13 (2006)
Issue (Month): 2 (March)
Contact details of provider:
Web page: http://www.elsevier.com/locate/jempfin
Other versions of this item:
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- GHYSELS, Eric & HARVEY, Andrew & RENAULT, Eric, 1995.
CORE Discussion Papers
1995069, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Ghysels, E. & Harvey, A. & Renault, E., 1996. "Stochastic Volatility," Cahiers de recherche 9613, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
- Ghysels, E. & Harvey, A. & Renault, E., 1996. "Stochastic Volatility," Cahiers de recherche 9613, Universite de Montreal, Departement de sciences economiques.
- Ghysels, E. & Harvey, A. & Renault, E., 1995. "Stochastic Volatility," Papers 95.400, Toulouse - GREMAQ.
- Eric Ghysels & Andrew Harvey & Éric Renault, 1995. "Stochastic Volatility," CIRANO Working Papers 95s-49, CIRANO.
- Hamilton, James D. & Susmel, Raul, 1994.
"Autoregressive conditional heteroskedasticity and changes in regime,"
Journal of Econometrics,
Elsevier, vol. 64(1-2), pages 307-333.
- Tom Doan, . "RATS programs to estimate Hamilton-Susmel Markov Switching ARCH model," Statistical Software Components RTZ00083, Boston College Department of Economics.
- Kim, C-J., 1991.
"Dynamic Linear Models with Markov-Switching,"
91-8, York (Canada) - Department of Economics.
- Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
- Kenneth D. West & Dongchul Cho, 1994.
"The Predictive Ability of Several Models of Exchange Rate Volatility,"
NBER Technical Working Papers
0152, National Bureau of Economic Research, Inc.
- West, Kenneth D. & Cho, Dongchul, 1995. "The predictive ability of several models of exchange rate volatility," Journal of Econometrics, Elsevier, vol. 69(2), pages 367-391, October.
- West, K.D. & Cho, D., 1993. "The Predictive Ability of Several Models of Exchange Rate Volatility," Working papers 9317r, Wisconsin Madison - Social Systems.
- Whitney K. Newey & Kenneth D. West, 1986.
"A Simple, Positive Semi-Definite, Heteroskedasticity and AutocorrelationConsistent Covariance Matrix,"
NBER Technical Working Papers
0055, National Bureau of Economic Research, Inc.
- Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
- Newey, Whitney K & West, Kenneth D, 1987. "A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix," Econometrica, Econometric Society, vol. 55(3), pages 703-08, May.
- Benjamin M. Friedman & David I. Laibson, 1989. "Economic Implications of Extraordinary Movements in Stock Prices," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 20(2), pages 137-190.
- Maravall, Agustin & Planas, Christophe, 1999.
"Estimation error and the specification of unobserved component models,"
Journal of Econometrics,
Elsevier, vol. 92(2), pages 325-353, October.
- Agustín Maravall & Cristophe Planas, 1996. "Estimation Error and the Specification of Unobserved Component Models," Banco de Espaï¿½a Working Papers 9608, Banco de Espa�a.
- Tim Bollerslev, 1986.
"Generalized autoregressive conditional heteroskedasticity,"
EERI Research Paper Series
EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
- Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
- Martin Evans, 2002.
"Real Risk, Inflation Risk, and the Term Structure,"
gueconwpa~02-02-10, Georgetown University, Department of Economics.
- Ole E. Barndorff-Nielsen & Neil Shephard, 2000.
"Econometric analysis of realised volatility and its use in estimating stochastic volatility models,"
2001-W4, Economics Group, Nuffield College, University of Oxford, revised 05 Jul 2001.
- Ole E. Barndorff-Nielsen & Shephard, 2002. "Econometric analysis of realized volatility and its use in estimating stochastic volatility models," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 64(2), pages 253-280.
- Andersen, Torben G & Bollerslev, Tim, 1998. "Answering the Skeptics: Yes, Standard Volatility Models Do Provide Accurate Forecasts," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 885-905, November.
- Diebold, Francis X & Mariano, Roberto S, 2002.
"Comparing Predictive Accuracy,"
Journal of Business & Economic Statistics,
American Statistical Association, vol. 20(1), pages 134-44, January.
- Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59.
- Andrews, Donald W K & Ploberger, Werner, 1994.
"Optimal Tests When a Nuisance Parameter Is Present Only under the Alternative,"
Econometric Society, vol. 62(6), pages 1383-1414, November.
- Tom Doan, . "REGHBREAK: RATS procedure to perform structural break test with bootstrapped p-values," Statistical Software Components RTS00176, Boston College Department of Economics.
- Tom Doan, . "APBREAKTEST: RATS procedure to implement Andrews-Ploberger Structural Break Test," Statistical Software Components RTS00006, Boston College Department of Economics.
- Tom Doan, . "APGRADIENTTEST: RATS procedure to perform Andrews-Ploberger Structural Break Test for GARCH/Maximum Likelihood," Statistical Software Components RTS00007, Boston College Department of Economics.
- Donald W.K. Andrews & Werner Ploberger, 1992. "Optimal Tests When a Nuisance Parameter Is Present Only Under the Alternative," Cowles Foundation Discussion Papers 1015, Cowles Foundation for Research in Economics, Yale University.
- Calvet, Laurent & Fisher, Adlai, 2001.
"Forecasting multifractal volatility,"
Journal of Econometrics,
Elsevier, vol. 105(1), pages 27-58, November.
- Laurent Calvet & Adlai Fisher, 1999. "Forecasting Multifractal Volatility," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-017, New York University, Leonard N. Stern School of Business-.
- Laurent Calvet, 2000. "Forecasting Multifractal Volatility," Harvard Institute of Economic Research Working Papers 1902, Harvard - Institute of Economic Research.
- Andrew C. Harvey, 1990. "The Econometric Analysis of Time Series, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 026208189x, December.
- Hamilton, James D., 1990. "Analysis of time series subject to changes in regime," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 39-70.
- Glosten, Lawrence R & Jagannathan, Ravi & Runkle, David E, 1993.
" On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks,"
Journal of Finance,
American Finance Association, vol. 48(5), pages 1779-1801, December.
- Lawrence R. Glosten & Ravi Jagannathan & David E. Runkle, 1993. "On the relation between the expected value and the volatility of the nominal excess return on stocks," Staff Report 157, Federal Reserve Bank of Minneapolis.
- Blair, Bevan J. & Poon, Ser-Huang & Taylor, Stephen J., 2001. "Forecasting S&P 100 volatility: the incremental information content of implied volatilities and high-frequency index returns," Journal of Econometrics, Elsevier, vol. 105(1), pages 5-26, November.
- Laurent E. Calvet, 2004. "How to Forecast Long-Run Volatility: Regime Switching and the Estimation of Multifractal Processes," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 2(1), pages 49-83.
- Hamilton, James D., 1996. "Specification testing in Markov-switching time-series models," Journal of Econometrics, Elsevier, vol. 70(1), pages 127-157, January.
- Harvey, Andrew & Ruiz, Esther & Sentana, Enrique, 1992. "Unobserved component time series models with Arch disturbances," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 129-157.
- Lamoureux, Christopher G & Lastrapes, William D, 1990. " Heteroskedasticity in Stock Return Data: Volume versus GARCH Effects," Journal of Finance, American Finance Association, vol. 45(1), pages 221-29, March.
- Mark Britten-Jones & Anthony Neuberger, 2000. "Option Prices, Implied Price Processes, and Stochastic Volatility," Journal of Finance, American Finance Association, vol. 55(2), pages 839-866, 04.
- Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
- Edoardo Otranto & Giampiero Gallo, 2002.
"A Nonparametric Bayesian Approach To Detect The Number Of Regimes In Markov Switching Models,"
Taylor & Francis Journals, vol. 21(4), pages 477-496.
- Edoardo Otranto & Giampiero M. Gallo, 2001. "A Nonparametric Bayesian Approach to Detect the Number of Regimes in Markov Switching Models," Econometrics Working Papers Archive wp2001_04, Universita' degli Studi di Firenze, Dipartimento di Statistica, Informatica, Applicazioni "G. Parenti".
- Elliott, Robert J. & Hunter, William C. & Jamieson, Barbara M., 1998. "Drift and volatility estimation in discrete time," Journal of Economic Dynamics and Control, Elsevier, vol. 22(2), pages 209-218, February.
- Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
- Bollerslev, Tim, 1987. "A Conditionally Heteroskedastic Time Series Model for Speculative Prices and Rates of Return," The Review of Economics and Statistics, MIT Press, vol. 69(3), pages 542-47, August.
- Bollerslev, Tim & Engle, Robert F. & Nelson, Daniel B., 1986. "Arch models," Handbook of Econometrics, in: R. F. Engle & D. McFadden (ed.), Handbook of Econometrics, edition 1, volume 4, chapter 49, pages 2959-3038 Elsevier.
- Luca De Angelis & Leonard J. Paas, 2013. "A dynamic analysis of stock markets using a hidden Markov model," Journal of Applied Statistics, Taylor & Francis Journals, vol. 40(8), pages 1682-1700, August.
- repec:onb:oenbwp:y:2010:i:2:b:1 is not listed on IDEAS
- M. Frömmel, 2007.
"Volatility Regimes in Central and Eastern European Countries’ Exchange Rates,"
Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium
07/487, Ghent University, Faculty of Economics and Business Administration.
- Michael Frömmel, 2010. "Volatility Regimes in Central and Eastern European Countries’ Exchange Rates," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 60(1), pages 2-21, February.
- Frömmel, Michael, 2006. "Volatility Regimes in Central and Eastern European Countries' Exchange Rates," Hannover Economic Papers (HEP) dp-333, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
- Fulvio Corsi, 2009. "A Simple Approximate Long-Memory Model of Realized Volatility," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 7(2), pages 174-196, Spring.
- L. Grossi & G. Morelli, 2006. "Robust volatility forecasts and model selection in financial time series," Economics Department Working Papers 2006-SE02, Department of Economics, Parma University (Italy).
- Thomas Lux & Leonardo Morales-Arias & Cristina Sattarhoff, 2011. "A Markov-switching Multifractal Approach to Forecasting Realized Volatility," Kiel Working Papers 1737, Kiel Institute for the World Economy.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.