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Volatility dynamics under duration-dependent mixing

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Author Info

  • Maheu, John M.
  • McCurdy, Thomas H.

Abstract

This paper proposes a new approach to modeling volatility changes and clustering. In particular, we use a parsimonious high-order Markov chain which allows for duration dependence. As in the standard 1st-order Markov-switching model, this structure can capture turning points and shifts in volatility due, for example, to policy changes or news events. However, unlike the 1st-order model, the duration-dependent Markov switching model is suited to exploiting the persistence associated with volatility clustering. To highlight the features of our model, we compare it to a popular benchmark, the GARCH model. Unlike the latter, the proposed parameterization allows time-varying persistence, includes a stochastic component for volatility, and incorporates anticipated discrete changes in the level of volatility. The empirical distribution generated by our proposed structure works well for the samples of data used in this paper. Implications for forecasts relevant for risk management are emphasized.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Empirical Finance.

Volume (Year): 7 (2000)
Issue (Month): 3-4 (November)
Pages: 345-372

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Handle: RePEc:eee:empfin:v:7:y:2000:i:3-4:p:345-372

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Web page: http://www.elsevier.com/locate/jempfin

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References

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Cited by:
  1. John M. Maheu & Thomas H. McCurdy & Yong Song, 2012. "Components of Bull and Bear Markets: Bull Corrections and Bear Rallies," Journal of Business & Economic Statistics, American Statistical Association, vol. 30(3), pages 391-403, July.
  2. Asger Lunde & Allan Timmermann, 2000. "Duration Dependence in Stock Prices: An Analysis of Bull and Bear Markets," Econometric Society World Congress 2000 Contributed Papers 1216, Econometric Society.
  3. Laurent Calvet & Adlai Fisher, 2003. "Regime-Switching and the Estimation of Multifractal Processes," Harvard Institute of Economic Research Working Papers 1999, Harvard - Institute of Economic Research.
  4. Suhejla Hoiti & Esfandiar Maasoumi & Michael McAleer & Daniel Slottje, 2005. "Measuring the Volatility in U.S. Treasury Benchmarks and Debt Instruments," DEA Working Papers 14, Universitat de les Illes Balears, Departament d'Economía Aplicada.

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