IDEAS home Printed from https://ideas.repec.org/p/cns/cnscwp/201205.html
   My bibliography  Save this paper

The Markov Switching Asymmetric Multiplicative Error Model

Author

Listed:
  • E. Otranto

Abstract

The empirical evidence behind the dynamics of high frequency based measures of volatility is that they exhibit persistence and at times abrupt changes in the average level by subperiods. In the past ten years this pattern has a clear interpretation in reference to the dot com bubble, the quiet period of expansion of credit and then the harsh times after the burst of the subprime mortgage crisis. We conjecture that the inadequacy of many econometric volatility models (a very high level of estimated persistence, serially correlated residuals) can be solved with an adequate representation of such a pattern. We insert a Markovian dynamics in a Multiplicative Error Model to represent the conditional expectation of the realized volatility, allowing us to address the issues of a slow moving average level of volatility and of a different dynamics across regime. We apply the model to realized volatility of the S&P500 index and we gauge the usefulness of such an approach by a more interpretable persistence, better residual properties, and an increased goodness of fit.

Suggested Citation

  • E. Otranto, 2012. "The Markov Switching Asymmetric Multiplicative Error Model," Working Paper CRENoS 201205, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
  • Handle: RePEc:cns:cnscwp:201205
    as

    Download full text from publisher

    File URL: https://crenos.unica.it/crenos/node/3514
    Download Restriction: no

    File URL: https://crenos.unica.it/crenos/sites/default/files/WP12-05.pdf
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. E. Otranto, 2012. "Spillover Effects in the Volatility of Financial Markets," Working Paper CRENoS 201217, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
    2. Giampiero M. Gallo & Edoardo Otranto, 2012. "Volatility Swings in the US Financial Markets," Econometrics Working Papers Archive 2012_03, Universita' degli Studi di Firenze, Dipartimento di Statistica, Informatica, Applicazioni "G. Parenti", revised Jul 2012.

    More about this item

    Keywords

    mem models; regime switching; realized volatility; volatility persistence;
    All these keywords.

    JEL classification:

    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cns:cnscwp:201205. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: CRENoS (email available below). General contact details of provider: https://edirc.repec.org/data/crenoit.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.