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Regime-Switching Process

Author

Listed:
  • Gilles Zumbach

    (Consulting in Financial Research)

Abstract

After a general presentation of the regime-switching processes, the simplest versions with two and three states are studied. The process with two states is always time-reversal invariant, but not the processes with three or more states. In order to obtain realistic probability density, the constraints on the parameters of a regime-switching process are quite strong. But within these constraints, it is not possible to obtain a realistic multiscale heteroscedasticity. The mug shots show clearly the limitations of this class of processes with respect to the desired stylized facts.

Suggested Citation

Handle: RePEc:spr:sprfcp:978-3-642-31742-2_9
DOI: 10.1007/978-3-642-31742-2_9
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