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On a dynamic mixture GARCH model

  • Xixin Cheng

    (Department of Statistics and Actuarial Science, University of Hong Kong)

  • Philip L. H. Yu

    (Department of Statistics and Actuarial Science, University of Hong Kong)

  • W. K. Li

    (Department of Statistics and Actuarial Science, University of Hong Kong)

This paper proposes a new mixture GARCH model with a dynamic mixture proportion. The mixture Gaussian distribution of the error can vary from time to time. The Bayesian Information Criterion and the EM algorithm are used to estimate the number of parameters as well as the model parameters and their standard errors. The new model is applied to the S&P500 Index and Hang Seng Index and compared with GARCH models with Gaussian error and Student's t error. The result shows that the IGARCH effect in these index returns could be the result of the mixture of one stationary volatility component with another non-stationary volatility component. The VaR based on the new model performs better than traditional GARCH-based VaRs, especially in unstable stock markets. Copyright © 2008 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/for.1093
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Article provided by John Wiley & Sons, Ltd. in its journal Journal of Forecasting.

Volume (Year): 28 (2009)
Issue (Month): 3 ()
Pages: 247-265

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Handle: RePEc:jof:jforec:v:28:y:2009:i:3:p:247-265
Contact details of provider: Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/2966

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  8. Sercu, Piet & Uppal, Raman & Van Hulle, Cynthia, 1995. " The Exchange Rate in the Presence of Transaction Costs: Implications for Tests of Purchasing Power Parity," Journal of Finance, American Finance Association, vol. 50(4), pages 1309-19, September.
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