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Bayesian estimation of a Markov-switching threshold asymmetric GARCH model with Student-t innovations

  • David Ardia

A Bayesian estimation of a regime-switching threshold asymmetric GARCH model is proposed. The specification is based on a Markov-switching model with Student-t innovations and K separate GJR(1,1) processes whose asymmetries are located at free non-positive threshold parameters. The model aims at determining whether or not: (i) structural breaks are present within the volatility dynamics; (ii) asymmetries (leverage effects) are present, and are different between regimes and (iii) the threshold parameters (locations of bad news) are similar between regimes. A novel MCMC scheme is proposed which allows for a fully automatic Bayesian estimation of the model. The presence of two distinct volatility regimes is shown in an empirical application to the Swiss Market Index log-returns. The posterior results indicate no differences with regards to the asymmetries and their thresholds when comparing highly volatile periods with the milder ones. Comparisons with a single-regime specification indicates a better in-sample fit and a better forecasting performance for the Markov-switching model. Copyright The Author(s). Journal compilation Royal Economic Society 2008

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Article provided by Royal Economic Society in its journal Econometrics Journal.

Volume (Year): 12 (2009)
Issue (Month): 1 (03)
Pages: 105-126

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Handle: RePEc:ect:emjrnl:v:12:y:2009:i:1:p:105-126
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