Modeling Multiple Regimes In Financial Volatility With A Flexible Coefficient Garch(1,1) Model
In this paper a flexible multiple regime GARCH(1,1)-type model is developed to describe the sign and size asymmetries and intermittent dynamics in financial volatility. The results of the paper are important to other nonlinear GARCH models. The proposed model nests some of the previous specifications found in the literature and has the following advantages. First, contrary to most of the previous models, more than two limiting regimes are possible, and the number of regimes is determined by a simple sequence of tests that circumvents identification problems that are usually found in nonlinear time series models. The second advantage is that the novel stationarity restriction on the parameters is relatively weak, thereby allowing for rich dynamics. It is shown that the model may have explosive regimes but can still be strictly stationary and ergodic. A simulation experiment shows that the proposed model can generate series with high kurtosis and low first-order autocorrelation of the squared observations and exhibit the so-called Taylor effect, even with Gaussian errors. Estimation of the parameters is addressed, and the asymptotic properties of the quasi-maximum likelihood estimator are derived under weak conditions. A Monte-Carlo experiment is designed to evaluate the finite-sample properties of the sequence of tests. Empirical examples are also considered.
Volume (Year): 25 (2009)
Issue (Month): 01 (February)
|Contact details of provider:|| Postal: Cambridge University Press, UPH, Shaftesbury Road, Cambridge CB2 8BS UK|
Web page: http://journals.cambridge.org/jid_ECT
When requesting a correction, please mention this item's handle: RePEc:cup:etheor:v:25:y:2009:i:01:p:117-161_09. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Keith Waters)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.