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Bayesian Estimation of a Markov-Switching Threshold Asymmetric GARCH Model with Student-t Innovations

A Bayesian estimation of a regime-switching threshold asymmetric GARCH model is proposed. The specification is based on a Markov-switching model with Student-t innovations and K separate GJR(1,1) processes whose asymmetries are located at free non-positive threshold parameters. The model aims at determining whether or not: (i) structural breaks are present within the volatility dynamics; (ii) asymmetries (leverage effects) are present, and are different between regimes; (iii) the threshold parameters (locations of bad news) are similar between regimes. A novel MCMC scheme is proposed which allows for a fully automatic Bayesian estimation of the model. The presence of two distinct volatility regimes is shown in an empirical application to the Swiss Market Index log-returns. The posterior results indicate no differences with regards to the asymmetries and their thresholds when comparing highly volatile periods with the milder ones. Comparisons with a single-regime specification indicates a better in-sample fit and a better forecasting performance for the Markov-switching model.

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Paper provided by Department of Quantitative Economics, University of Freiburg/Fribourg Switzerland in its series DQE Working Papers with number 6.

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Length: 22 pages
Date of creation: 12 Apr 2007
Date of revision: 08 Jul 2008
Publication status: Published in Econometrics Journal, 2009, vol. 12, nr. 1, pp.105--126.
Handle: RePEc:fri:dqewps:wp0006
Contact details of provider: Postal: Bd de Pérolles 90, CH-1700 Fribourg
Phone: +41 26 300 8200
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