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Theory and inference for a Markov switching GARCH model

Author

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  • BAUWENS, Luc

    (Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE))

  • PREMINGER, Arie
  • ROMBOUTS, Jeroen V.K.

Abstract

We develop a Markov-switching GARCH model (MS-GARCH) wherein the conditional mean and variance switch in time from one GARCH process to another. The switching is governed by a hidden Markov chain. We provide sufficient conditions for geometric ergodicity and existence of moments of the process. Because of path dependence, maximum likelihood estimation is not feasible. By enlarging the parameter space to include the state variables, Bayesian estimation using a Gibbs sampling algorithm is feasible. We illustrate the model on SP500 daily returns.

Suggested Citation

  • BAUWENS, Luc & PREMINGER, Arie & ROMBOUTS, Jeroen V.K., 2007. "Theory and inference for a Markov switching GARCH model," LIDAM Discussion Papers CORE 2007055, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  • Handle: RePEc:cor:louvco:2007055
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    References listed on IDEAS

    as
    1. Christian Francq & Michel Roussignol & Jean‐Michel Zakoian, 2001. "Conditional Heteroskedasticity Driven by Hidden Markov Chains," Journal of Time Series Analysis, Wiley Blackwell, vol. 22(2), pages 197-220, March.
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    More about this item

    Keywords

    GARCH; Markov-switching; Bayesian inference;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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