This paper proposes a new kind of asymmetric GARCh where the conditional variance obeys two different regimes with a smooth transition function. In one formulation, the conditional variance reacts differently to negative and positive shocks while in a second formulation, small and big shocks have separate effects. The introduction of a threshold allows for a mixed effect. A Bayesian strategy, besed on the compatison between posterior and predictive Bayesian residuals, is built for detectung the presence and the shape of nonlinearities. The method is applied to the Brussels and Tokyo stock indexes. The need for an alternative parameterisation of the GARCH model is emphasises as a solution to numerical problems.
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Paper provided by Universite catholique de Louvain - Center for Operations Research and Economics (CORE) in its series Papers with number
9866.
Length: 29 pages Date of creation: 1998 Date of revision: Handle: RePEc:fth:louvco:9866
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Find related papers by JEL classification: C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Bayesian Analysis C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
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