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Bayesian semiparametric stochastic volatility modeling

  • Mark J. Jensen
  • John M. Maheu

This paper extends the existing fully parametric Bayesian literature on stochastic volatility to allow for more general return distributions. Instead of specifying a particular distribution for the return innovation, we use nonparametric Bayesian methods to flexibly model the skewness and kurtosis of the distribution while continuing to model the dynamics of volatility with a parametric structure. Our semiparametric Bayesian approach provides a full characterization of parametric and distributional uncertainty. We present a Markov chain Monte Carlo sampling approach to estimation with theoretical and computational issues for simulation from the posterior predictive distributions. The new model is assessed based on simulation evidence, an empirical example, and comparison to parametric models.

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Paper provided by Federal Reserve Bank of Atlanta in its series FRB Atlanta Working Paper with number 2008-15.

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Date of creation: 2008
Date of revision:
Handle: RePEc:fip:fedawp:2008-15
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