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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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    References listed on IDEAS

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    Cited by:

    1. Chappell, Daniel, 2018. "Regime heteroskedasticity in Bitcoin: A comparison of Markov switching models," MPRA Paper 90682, University Library of Munich, Germany.
    2. Halkos, George & Tzirivis, Apostolos, 2018. "Effective energy commodities’ risk management: Econometric modeling of price volatility," MPRA Paper 90781, University Library of Munich, Germany.
    3. Guglielmo Maria Caporale & Timur Zekokh, 2018. "Modelling Volatility of Cryptocurrencies Using Markov-Switching Garch Models," CESifo Working Paper Series 7167, CESifo Group Munich.
    4. repec:eee:intfor:v:34:y:2018:i:4:p:733-747 is not listed on IDEAS
    5. Sylvia Kaufmann, 2016. "Hidden Markov models in time series, with applications in economics," Working Papers 16.06, Swiss National Bank, Study Center Gerzensee.
    6. BenSaïda, Ahmed, 2015. "The frequency of regime switching in financial market volatility," Journal of Empirical Finance, Elsevier, vol. 32(C), pages 63-79.

    More about this item

    Keywords

    Bayesian inference; Structural breaks; Recurrent regimes; Marginal likelihood; GARCH; Forecasting;

    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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