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Regime switching GARCH models

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Author Info

  • Luc Bauwens
  • Arie Preminger
  • Jeroen V.K. Rombouts

    ()
    (IEA, HEC Montréal)

Abstract

We develop univariate regime-switching GARCH (RS-GARCH) models wherein the conditional variance switches in time from one GARCH process to another. The switching is governed by a time-varying probability, specified as a function of past information. We provide sufficient conditions for stationarity and existence of moments. Because of path dependence, maximum likelihood estimation is infeasible. By enlarging the parameter space to include the state variables, Bayesian estimation using a Gibbs sampling algorithm is feasible. We apply this model using the NASDAQ daily return series.

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File URL: http://www.hec.ca/iea/cahiers/2006/iea0608_jrombouts.pdf
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Bibliographic Info

Paper provided by HEC Montréal, Institut d'économie appliquée in its series Cahiers de recherche with number 06-08.

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Length: 26 pages
Date of creation: Jun 2006
Date of revision:
Handle: RePEc:iea:carech:0608

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Postal: Institut d'économie appliquée HEC Montréal 3000, Chemin de la Côte-Sainte-Catherine Montréal, Québec H3T 2A7
Phone: (514) 340-6463
Fax: (514) 340-6469
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Web page: http://www.hec.ca/iea/
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Postal: Institut d'économie appliquée HEC Montréal 3000, Chemin de la Côte-Sainte-Catherine Montréal, Québec H3T 2A7
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Related research

Keywords: GARCH; regime switching; Bayesian inference.;

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References

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  1. 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.
  2. Bauwens, L. & Bos, C.S. & van Dijk, H.K., 1999. "Adaptive Polar Sampling with an Application to a Bayes Measure of Value-at-Risk," Econometric Institute Research Papers TI 99-082/4, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
  3. Bollen, Nicolas P. B. & Gray, Stephen F. & Whaley, Robert E., 2000. "Regime switching in foreign exchange rates: Evidence from currency option prices," Journal of Econometrics, Elsevier, vol. 94(1-2), pages 239-276.
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  7. BAUWENS, Luc & ROMBOUTS, Jeroen V.K., 2005. "Bayesian inference for the mixed conditional heteroskedasticity model," CORE Discussion Papers 2005085, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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  18. Luc Bauwens & Charles S. Bos & Herman K. van Dijk & Rutger D. van Oest, 2002. "Adaptive Polar Sampling," Computing in Economics and Finance 2002 307, Society for Computational Economics.
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  22. repec:fth:louvco:9957 is not listed on IDEAS
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Citations

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Cited by:
  1. BAUWENS, Luc & STORTI, Giuseppe, . "A component GARCH model with time varying weights," CORE Discussion Papers RP -2125, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. BAUWENS, Luc & HAUTSCH, Nikolaus, . "Modelling financial high frequency data using point processes," CORE Discussion Papers RP -2123, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Zhongfang He & John M Maheu, 2008. "Real Time Detection of Structural Breaks in GARCH Models," Working Papers tecipa-336, University of Toronto, Department of Economics.
  4. Lanne, Markku & Luoto, Jani, 2007. "Robustness of the Risk-Return Relationship in the U.S. Stock Market," MPRA Paper 3879, University Library of Munich, Germany.
  5. Chun Liu & John M. Maheu, 2008. "Are There Structural Breaks in Realized Volatility?," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 6(3), pages 326-360, Summer.
  6. Haas, Markus & Krause, Jochen & Paolella, Marc S. & Steude, Sven C., 2013. "Time-varying mixture GARCH models and asymmetric volatility," The North American Journal of Economics and Finance, Elsevier, vol. 26(C), pages 602-623.
  7. Nyberg, Henri, 2010. "QR-GARCH-M Model for Risk-Return Tradeoff in U.S. Stock Returns and Business Cycles," MPRA Paper 23724, University Library of Munich, Germany.
  8. Yuan, Chunming, 2011. "The exchange rate and macroeconomic determinants: Time-varying transitional dynamics," The North American Journal of Economics and Finance, Elsevier, vol. 22(2), pages 197-220, August.
  9. Michail Karoglou & Panicos Demetriades & Siong Law, 2011. "One date, one break?," Empirical Economics, Springer, vol. 41(1), pages 7-24, August.
  10. Yuan, Chunming, 2011. "Forecasting exchange rates: The multi-state Markov-switching model with smoothing," International Review of Economics & Finance, Elsevier, vol. 20(2), pages 342-362, April.
  11. Vo, Minh T., 2009. "Regime-switching stochastic volatility: Evidence from the crude oil market," Energy Economics, Elsevier, vol. 31(5), pages 779-788, September.
  12. Chunming Yuan, 2008. "The Exchange Rate and Macroeconomic Determinants: Time-Varying Transitional Dynamics," UMBC Economics Department Working Papers 09-114, UMBC Department of Economics, revised 01 Nov 2009.

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