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A Bayesian method of change-point estimation with recurrent regimes: Application to GARCH models

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  • Bauwens, Luc
  • De Backer, Bruno
  • Dufays, Arnaud

Abstract

We present an estimation and forecasting method, based on a differential evolution MCMC method, for inference in GARCH models subjected to an unknown number of structural breaks at unknown dates. We treat break dates as parameters and determine the number of breaks by computing the marginal likelihoods of competing models. We allow for both recurrent and non-recurrent (change-point) regime specifications. We illustrate the estimation method through simulations and apply it to seven financial time series of daily returns. We find structural breaks in the volatility dynamics of all series and recurrent regimes in nearly all series. Finally, we carry out a forecasting exercise to evaluate the usefulness of structural break models.

Suggested Citation

  • Bauwens, Luc & De Backer, Bruno & Dufays, Arnaud, 2014. "A Bayesian method of change-point estimation with recurrent regimes: Application to GARCH models," Journal of Empirical Finance, Elsevier, vol. 29(C), pages 207-229.
  • Handle: RePEc:eee:empfin:v:29:y:2014:i:c:p:207-229
    DOI: 10.1016/j.jempfin.2014.06.008
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    1. Bauwens, Luc & Dufays, Arnaud & Rombouts, Jeroen V.K., 2014. "Marginal likelihood for Markov-switching and change-point GARCH models," Journal of Econometrics, Elsevier, vol. 178(P3), pages 508-522.
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    Cited by:

    1. Ataurima Arellano, Miguel & Rodríguez, Gabriel, 2020. "Empirical modeling of high-income and emerging stock and Forex market return volatility using Markov-switching GARCH models," The North American Journal of Economics and Finance, Elsevier, vol. 52(C).
    2. Vahidin Jeleskovic & Mirko Meloni & Zahid Irshad Younas, 2020. "Cryptocurrencies: A Copula Based Approach for Asymmetric Risk Marginal Allocations," MAGKS Papers on Economics 202034, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    3. Caporale, Guglielmo Maria & Kang, Woo-Young & Spagnolo, Fabio & Spagnolo, Nicola, 2020. "Non-linearities, cyber attacks and cryptocurrencies," Finance Research Letters, Elsevier, vol. 32(C).
    4. Dufays, Arnaud & Rombouts, Jeroen V.K., 2020. "Relevant parameter changes in structural break models," Journal of Econometrics, Elsevier, vol. 217(1), pages 46-78.
    5. Chappell, Daniel, 2018. "Regime heteroskedasticity in Bitcoin: A comparison of Markov switching models," MPRA Paper 90682, University Library of Munich, Germany.
    6. Halkos, George & Tzirivis, Apostolos, 2018. "Effective energy commodities’ risk management: Econometric modeling of price volatility," MPRA Paper 90781, University Library of Munich, Germany.
    7. Marius Galabe Sampid & Haslifah M Hasim & Hongsheng Dai, 2018. "Refining value-at-risk estimates using a Bayesian Markov-switching GJR-GARCH copula-EVT model," PLOS ONE, Public Library of Science, vol. 13(6), pages 1-33, June.
    8. Jules Clement Mba & Sutene Mwambi, 2020. "A Markov-switching COGARCH approach to cryptocurrency portfolio selection and optimization," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 34(2), pages 199-214, June.
    9. Katleho Makatjane & Ntebogang Moroke, 2021. "Predicting Extreme Daily Regime Shifts in Financial Time Series Exchange/Johannesburg Stock Exchange—All Share Index," IJFS, MDPI, vol. 9(2), pages 1-18, March.
    10. Caporale, Guglielmo Maria & Zekokh, Timur, 2019. "Modelling volatility of cryptocurrencies using Markov-Switching GARCH models," Research in International Business and Finance, Elsevier, vol. 48(C), pages 143-155.
    11. Ardia, David & Bluteau, Keven & Boudt, Kris & Catania, Leopoldo, 2018. "Forecasting risk with Markov-switching GARCH models:A large-scale performance study," International Journal of Forecasting, Elsevier, vol. 34(4), pages 733-747.
    12. Nick James & Roman Marchant & Richard Gerlach & Sally Cripps, 2019. "Bayesian Nonparametric Adaptive Spectral Density Estimation for Financial Time Series," Papers 1902.03350, arXiv.org.
    13. Halkos, George E. & Tsirivis, Apostolos S., 2019. "Effective energy commodity risk management: Econometric modeling of price volatility," Economic Analysis and Policy, Elsevier, vol. 63(C), pages 234-250.
    14. Sylvia Kaufmann, 2016. "Hidden Markov models in time series, with applications in economics," Working Papers 16.06, Swiss National Bank, Study Center Gerzensee.
    15. BenSaïda, Ahmed, 2015. "The frequency of regime switching in financial market volatility," Journal of Empirical Finance, Elsevier, vol. 32(C), pages 63-79.

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    More about this item

    Keywords

    Bayesian inference; Structural breaks; Recurrent regimes; Marginal likelihood; GARCH; Forecasting;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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