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Classification of Volatility in Presence of Changes in Model Parameters

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  • E. Otranto

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Abstract

The classification of volatility of financial time series has recently received a lot of contributions - in particular using model based clustering algorithms. Recent works have evidenced how volatility structure can vary along time, with gradual or abrupt changes in the coefficients of the model. We wonder if these changes can affect the classification of series in terms of similar volatility structure. We propose to classify the level of the unconditional volatility obtained from Multiplicative Er- ror Models with the possibility of changes in the parameters of the model in terms of regime switching or time varying smoothed coefficients. They provide different unconditional volatility structures with a proper interpretation, useful to represent different situations of interest. The different methodologies are coherent with each other and provide a common synthetic pattern. The procedure is experimented on fifteen stock indices volatilities.

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Bibliographic Info

Paper provided by Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia in its series Working Paper CRENoS with number 201113.

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Date of creation: 2011
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Handle: RePEc:cns:cnscwp:201113

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Keywords: markov switching; smooth transition; unconditional volatility; clustering; amem;

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  1. Corduas, Marcella & Piccolo, Domenico, 2008. "Time series clustering and classification by the autoregressive metric," Computational Statistics & Data Analysis, Elsevier, vol. 52(4), pages 1860-1872, January.
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  3. Dueker, Michael J, 1997. "Markov Switching in GARCH Processes and Mean-Reverting Stock-Market Volatility," Journal of Business & Economic Statistics, American Statistical Association, vol. 15(1), pages 26-34, January.
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  6. Otranto, Edoardo, 2010. "Identifying financial time series with similar dynamic conditional correlation," Computational Statistics & Data Analysis, Elsevier, vol. 54(1), pages 1-15, January.
  7. Otranto, Edoardo, 2008. "Clustering heteroskedastic time series by model-based procedures," Computational Statistics & Data Analysis, Elsevier, vol. 52(10), pages 4685-4698, June.
  8. Robert Engle, 2002. "New frontiers for arch models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 17(5), pages 425-446.
  9. BAUWENS, Luc & LAURENT, Sébastien & ROMBOUTS, Jeroen, 2003. "Multivariate GARCH models: a survey," CORE Discussion Papers 2003031, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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  11. Giampiero Gallo & Edoardo Otranto, 2007. "Volatility Spillovers, Interdependence and Comovements: A Markov Switching Approach," Econometrics Working Papers Archive wp2007_11, Universita' degli Studi di Firenze, Dipartimento di Statistica "G. Parenti".
  12. Theodossiou, Panayiotis & Lee, Unro, 1993. "Mean and Volatility Spillovers across Major National Stock Markets: Further Empirical Evidence," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 16(4), pages 337-50, Winter.
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  16. Edoardo Otranto & Giampiero Gallo, 2002. "A Nonparametric Bayesian Approach To Detect The Number Of Regimes In Markov Switching Models," Econometric Reviews, Taylor and Francis Journals, vol. 21(4), pages 477-496.
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Cited by:
  1. Giampiero M. Gallo & Edoardo Otranto, 2012. "Volatility Swings in the US Financial Markets," Econometrics Working Papers Archive 2012_03, Universita' degli Studi di Firenze, Dipartimento di Statistica "G. Parenti", revised Jul 2012.

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