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Hierarchical Markov normal mixture models with applications to financial asset returns

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Author Info
John Geweke () (Corresponding author: Department of Economics , University of Iowa, Iowa City IA 52242, USA.)
Gianni Amisano () (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)

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Abstract

With the aim of constructing predictive distributions for daily returns, we introduce a new Markov normal mixture model in which the components are themselves normal mixtures. We derive the restrictions on the autocovariances and linear representation of integer powers of the time series in terms of the number of components in the mixture and the roots of the Markov process. We use the model prior predictive distribution to study its implications for some interesting functions of returns. We apply the model to construct predictive distributions of daily S&P500 returns, dollar-pound returns, and one- and ten-year bonds. We compare the performance of the model with ARCH and stochastic volatility models using predictive likelihoods. The model's performance is about the same as its competitors for the bond returns, better than its competitors for the S&P 500 returns, and much better for the dollar-pound returns. Validation exercises identify some potential improvements. JEL Classification: C53, G12, C11, C14.

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Paper provided by European Central Bank in its series Working Paper Series with number 831.

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Length: 75 pages
Date of creation: Nov 2007
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Handle: RePEc:ecb:ecbwps:20070831

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Related research
Keywords: Asset returns; Bayesian; forecasting; MCMC; mixture models.;

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  2. Gourieroux Christian & Monfort Alain & Trognon A, 1981. "Pseudo maximum likelihood methods : theory," CEPREMAP Working Papers (Couverture Orange) 8129, CEPREMAP.
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  3. Geweke, John, 1989. "Bayesian Inference in Econometric Models Using Monte Carlo Integration," Econometrica, Econometric Society, vol. 57(6), pages 1317-39, November. [Downloadable!] (restricted)
  4. Diebold, Francis X. & Inoue, Atsushi, 2001. "Long memory and regime switching," Journal of Econometrics, Elsevier, vol. 105(1), pages 131-159, November. [Downloadable!] (restricted)
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  5. Harvey, Campbell R. & Siddique, Akhtar, 1999. "Autoregressive Conditional Skewness," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(04), pages 465-487, December. [Downloadable!]
  6. Geweke, John & Whiteman, Charles, 2006. "Bayesian Forecasting," Handbook of Economic Forecasting, Elsevier. [Downloadable!] (restricted)
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  9. John Geweke, 2004. "Getting It Right: Joint Distribution Tests of Posterior Simulators," Journal of the American Statistical Association, American Statistical Association, vol. 99, pages 799-804, January. [Downloadable!] (restricted)
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  11. Gallant, Ronald & Tauchen, George, 1989. "Seminonparametric Estimation of Conditionally Constrained Heterogeneous Processes: Asset Pricing Applications," Econometrica, Econometric Society, vol. 57(5), pages 1091-1120, September. [Downloadable!] (restricted)
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  12. Chib, Siddhartha, 1996. "Calculating posterior distributions and modal estimates in Markov mixture models," Journal of Econometrics, Elsevier, vol. 75(1), pages 79-97, November. [Downloadable!] (restricted)
  13. Bollerslev, Tim & Ole Mikkelsen, Hans, 1996. "Modeling and pricing long memory in stock market volatility," Journal of Econometrics, Elsevier, vol. 73(1), pages 151-184, July. [Downloadable!] (restricted)
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  16. Chung-Ming Kuan & Halbert White, 1992. "Artificial Neural Networks: An Econometric Perspective," University of California at San Diego, Economics Working Paper Series 92-11, Department of Economics, UC San Diego.
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  17. Jacquier, Eric & Polson, Nicholas G & Rossi, Peter E, 1994. "Bayesian Analysis of Stochastic Volatility Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(4), pages 371-89, October.
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Cited by:
(explanations, 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.)

  1. Amedeo Fossati & Rosella Levaggi, 2008. "Delay is not the answer: waiting time in health care & income redistribution," Working Papers 0801, University of Brescia, Department of Economics. [Downloadable!]
  2. John Geweke & Gianni Amisano, 2008. "Optimal Prediction Pools," Working Paper Series 22-08, Rimini Centre for Economic Analysis, revised Jan 2008. [Downloadable!]
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