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Hidden Markov models with t components. Increased persistence and other aspects

  • Jan Bulla

Hidden Markov models have been applied in many different fields, including econometrics and finance. However, the lion's share of the investigated models concerns Markovian mixtures of Gaussian distributions. We present an extension to conditional t-distributions, including models with unequal distribution types in different states. It is shown that the extended models, on the one hand, reproduce various stylized facts of daily returns better than the common Gaussian model. On the other hand, robustness to outliers and persistence of the visited states increases significantly.

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Article provided by Taylor & Francis Journals in its journal Quantitative Finance.

Volume (Year): 11 (2010)
Issue (Month): 3 ()
Pages: 459-475

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Handle: RePEc:taf:quantf:v:11:y:2010:i:3:p:459-475
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  11. Maheu, John M & McCurdy, Thomas H, 2000. "Identifying Bull and Bear Markets in Stock Returns," Journal of Business & Economic Statistics, American Statistical Association, vol. 18(1), pages 100-112, January.
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