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Business Cycle and Stock Market Volatility: A Particle Filter Approach

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  • Roberto Casarin
  • Carmine Trecroci

Abstract

The recent observed decline of business cycle variability suggests that broad macroeconomic risk may have fallen as well. This may in turn have some impact on equity risk premia. We investigate the latent structures in the volatilities of the business cycle and stock market valuations by estimating a Markov switching stochastic volatility model. We propose a sequential Monte Carlo technique for the Bayesian inference on both the unknown parameters and the latent variables of the hidden Markov model. Sequential importance sampling is used for filtering the latent variables and kernel estimator with a multiple-bandwidth is employed to reconstruct the parameter posterior distribution. We find that the switch to lower variability has occurred in both business cycle and stock market variables along similar patterns.

Suggested Citation

  • Roberto Casarin & Carmine Trecroci, 2006. "Business Cycle and Stock Market Volatility: A Particle Filter Approach," Working Papers ubs0603, University of Brescia, Department of Economics.
  • Handle: RePEc:ubs:wpaper:ubs0603
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    References listed on IDEAS

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    1. Francesco Menoncin & Rosella Nicolini, 2005. "The optimal behaviour of firms facing stochastic costs," Working Papers ubs0501, University of Brescia, Department of Economics.
    2. Chiara Dalla Nogare & Roberto Ricciuti, "undated". "Chief Executives' Term Limits and Fiscal Policy Choices: International Evidence," Working Papers ubs0411, University of Brescia, Department of Economics.
    3. Francesco Menoncin & Marco Tronzano, 2007. "Optimal Real Exchange Rate Targeting. A Stochastic Analysis," Revue économique, Presses de Sciences-Po, vol. 58(4), pages 807-840.
    4. Michele Moretto & Paola Valbonesi, "undated". "Dynamic Firm Regulation with Endogenous Profit-Sharing," Working Papers ubs0410, University of Brescia, Department of Economics.
    5. Michele Polo & Carlo Scarpa, 2003. "Entry Without Competition," Working Papers 245, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
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    Cited by:

    1. He, Zhongfang & Maheu, John M., 2010. "Real time detection of structural breaks in GARCH models," Computational Statistics & Data Analysis, Elsevier, vol. 54(11), pages 2628-2640, November.
    2. Martin Meier & Enrico Minelli & Herakles Polemarchakis, 2014. "Competitive markets with private information on both sides," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 55(2), pages 257-280, February.
    3. Rosella Levaggi & Francesco Menoncin, 2009. "Decentralized provision of merit and impure public goods," Working Papers 0909, University of Brescia, Department of Economics.
    4. Bisin, A. & Geanakoplos, J.D. & Gottardi, P. & Minelli, E. & Polemarchakis, H., 2011. "Markets and contracts," Journal of Mathematical Economics, Elsevier, vol. 47(3), pages 279-288.
    5. Francesco Menoncin & Paolo Panteghini, 2009. "Retrospective Capital Gains Taxation in the Real World," CESifo Working Paper Series 2674, CESifo Group Munich.
    6. Amisano, Gianni & Tristani, Oreste, 2010. "Euro area inflation persistence in an estimated nonlinear DSGE model," Journal of Economic Dynamics and Control, Elsevier, vol. 34(10), pages 1837-1858, October.
    7. Del Boca, Alessandra & Fratianni, Michele & Spinelli, Franco & Trecroci, Carmine, 2010. "The Phillips curve and the Italian lira, 1861-1998," The North American Journal of Economics and Finance, Elsevier, vol. 21(2), pages 182-197, August.
    8. Alessandro Fedele & Paolo M. Panteghini & Sergio Vergalli, 2011. "Optimal Investment and Financial Strategies under Tax‐Rate Uncertainty," German Economic Review, Verein für Socialpolitik, vol. 12(4), pages 438-468, November.
    9. Amedeo Fossati & Rosella Levaggi, 2008. "Delay is not the answer: waiting time in health care & income redistribution," Working Papers 0801, University of Brescia, Department of Economics.
    10. Alessandro Fedele & Raffaele Miniaci, 2010. "Do Social Enterprises Finance Their Investments Differently from For-profit Firms? The Case of Social Residential Services in Italy," Journal of Social Entrepreneurship, Taylor & Francis Journals, vol. 1(2), pages 174-189, October.
    11. Alessandro Fedele & Francesco Liucci & Andrea Mantovani, 2009. "Credit availability in the crisis: the European investment bank group," Working Papers 0913, University of Brescia, Department of Economics.
    12. Luis Alberiko & OlaOluwa S. Yaya & Olarenwaju I. Shittu, 2015. "Fractional integration and asymmetric volatility in european, asian and american bull and bear markets. Applications to high frequency stock data," NCID Working Papers 07/2015, Navarra Center for International Development, University of Navarra.
    13. Cho, Jaeho & Yoo, Byoung Hark, 2011. "The Korean stock market volatility during the currency crisis and the credit crisis," Japan and the World Economy, Elsevier, vol. 23(4), pages 246-252.

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