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Stochastic Volatility Model with Leverage and Asymmetrically Heavy-Tailed Error Using GH Skew Student's t-Distribution

  • Jouchi Nakajima

    (Department of Statistical Science, Duke University and Bank of Japan)

  • Yasuhiro Omori

    (Faculty of Economics, University of Tokyo)

Bayesian analysis of a stochastic volatility model with a generalized hyperbolic (GH) skew Student's t-error distribution is described where we first consider an asymmetric heavy-tailness as well as leverage effects. An efficient Markov chain Monte Carlo estimation method is described exploiting a normal variance-mean mixture representation of the error distribution with an inverse gamma distribution as a mixing distribution. The proposed method is illustrated using simulated data, daily TOPIX and S&P500 stock returns. The model comparison for stock returns is conducted based on the marginal likelihood in the empirical study. The strong evidence of the leverage and asymmetric heavy-tailness is found in the stock returns. Further, the prior sensitivity analysis is conducted to investigate whether obtained results are robust with respect to the choice of the priors.

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Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-701.

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Length: 26pages
Date of creation: Dec 2009
Date of revision:
Handle: RePEc:tky:fseres:2009cf701
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