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Conditional Heteroscedasticity in Qualitative Response Models of Time Series: A Gibbs-Sampling Approach to the Bank Prime Rate

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  • Dueker, Michael

Abstract

Previous time series applications of qualitative response models have ignored features of the data, such as conditional heteroscedasticity, that are routinely addressed in time series econometrics of financial data. This article addresses this issue by adding Markov-switching heteroscedasticity to a dynamic ordered probit model of discrete changes in the bank prime lending rate and estimating via the Gibbs sampler. The dynamic ordered probit model of Eichengreen, Watson, and Grossman allows for serial autocorrelation in probit analysis of a time series, and this article demonstrates the relative simplicity of estimating a dynamic ordered probit using the Gibbs sampler instead of the Eichengreen et al. maximum likelihood procedure. In addition, the extension to regime-switching parameters and conditional heteroscedasticity is easy to implement under Gibbs sampling. The article compares tests of goodness of fit between dynamic ordered probit models of the prime rate that have constant variance and conditional heteroscedasticity.

Suggested Citation

  • Dueker, Michael, 1999. "Conditional Heteroscedasticity in Qualitative Response Models of Time Series: A Gibbs-Sampling Approach to the Bank Prime Rate," Journal of Business & Economic Statistics, American Statistical Association, vol. 17(4), pages 466-472, October.
  • Handle: RePEc:bes:jnlbes:v:17:y:1999:i:4:p:466-72
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