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Author: André Oliveira Santos Publisher: ISBN: Category : Languages : en Pages : 108
Book Description
This thesis focuses applications of GARCH and regime switching models to financial markets and contains four chapters. The second chapter allows different parameters in the GARCH process for different situations of volatility in financial markets. The data generating process for asset returns has a second moment that is time-varying, persistent and subject to suddent regime shifts. The third chapter identifies how regime-dependent stochastic trends in fundamentals affect the behavior of exchange rates given an exchange rate determination model. Big swings in exchange rates in the chapter are the result of stochastic trends in fundamentals if exchange rates are an endogenous variable in the economy. Finally, the fourth chapter tests the forward-looking rational expectations monetary model of exchange rate determination with present value models, in a VAR context and when the data generation process is subject to changes in regime.
Author: André Oliveira Santos Publisher: ISBN: Category : Languages : en Pages : 108
Book Description
This thesis focuses applications of GARCH and regime switching models to financial markets and contains four chapters. The second chapter allows different parameters in the GARCH process for different situations of volatility in financial markets. The data generating process for asset returns has a second moment that is time-varying, persistent and subject to suddent regime shifts. The third chapter identifies how regime-dependent stochastic trends in fundamentals affect the behavior of exchange rates given an exchange rate determination model. Big swings in exchange rates in the chapter are the result of stochastic trends in fundamentals if exchange rates are an endogenous variable in the economy. Finally, the fourth chapter tests the forward-looking rational expectations monetary model of exchange rate determination with present value models, in a VAR context and when the data generation process is subject to changes in regime.
Author: Yanlin Shi Publisher: ISBN: Category : Time-series analysis Languages : en Pages : 326
Book Description
This thesis is a collection of essays on modelling volatility with time series techniques. The first essay addresses the question of modelling structural breaks in the Fractionally Integrated Generalised Autoregressive Conditional Heteroskedasticity (FIGARCH) model. By detecting structural change points via the Markov Regime-Switching (MRS) framework, a two-stage Three-State FIGARCH (3S-FIGARCH) model is proposed. Compared with various existing FIGARCH family models, our empirical results suggest that the 3S-FIGARCH model is preferred in all cases and can potentially provide a more reliable estimate of the long-memory parameter. The second essay examines the confusion between long memory and regime switching in volatility via a set of Monte Carlo simulations. A theoretical proof is provided to show that this confusion is caused by the effects of the smoothing probability from the data-generating process (DGP) of the MRS-GARCH model. To control for these effects, the MRS-FIGARCH model is proposed. By conducting a set of Monte Carlo simulations, we show that the MRS-FIGARCH model can effectively distinguish between the pure FIGARCH and pure MRS-GARCH DGPs. Further, an empirical application suggests that the MRS-FIGARCH can be a widely useful tool for volatility modelling. The third essay empirically studies the relation between public information arrivals and intraday stock return volatility. Motivated by the Mixture of Distribution Hypothesis (MDH) and the study of Veronesi (1999), we fit hourly Standard & Poor's (S&P) 100 stock return data with the MRS-GARCH model to investigate the effect of the quantity and quality of news on stock return volatility in the calm (low volatility) and turbulent (high volatility) states. The effect of news on the persistence and magnitude of volatility depends on the quality of news and the state of stock return volatility. In addition, this effect varies across sectors and firm sizes. The fourth essay analyses the effects of news on the so-called 'idiosyncratic volatility puzzle'. By empirically modelling the stock return data from the Center for Research in Security Prices (CRSP) database from 2000 to 2011, we demonstrate that both the quantity and quality of news can significantly explain the effect of idiosyncratic volatility on excess returns. Specifically, when news effects are appropriately controlled, the average magnitude of this effect can be reduced by roughly 50 per cent.
Author: Jing Wu (Ph. D.) Publisher: ISBN: Category : Languages : en Pages : 322
Book Description
My dissertation consists of three essays focusing on modeling financial asset return and volatility. The first essay proposes a threshold GARCH model to describe the regimeswitching in volatility dynamics of financial asset returns. In the threshold model the switching of regimes is triggered by an observable threshold variable, while volatility follows a GARCH process within each regime. This model can be viewed as a special case of the random coefficient GARCH model. We establish theoretical conditions, which ensure that the return process in the threshold model is strictly stationary, as well as conditions for the existence of finite variance and fourth moment. A simulation study is further conducted to examine the finite sample properties of the maximum likelihood estimator. The second essay extends our study of the threshold GARCH model to an empirical application. The empirical results support the use of the threshold variable to identify the regime shifts in the volatility process. Especially when VIX is used as the threshold, we are able to separate the clustering of volatile periods corresponding to various financial crises. According to 5 common measures on forecasting evaluation, the threshold GARCH model provides better volatility forecasts for stocks as well as currency exchange rates. The third essay examines the effect of time structure on the estimation performance of independent component analysis (ICA) models and provides guidance in applying the ICA model to time series data. We compare the performance of the basic ICA model to the time series ICA model in which the cross-autocovariances are used as a measure to achieve independence. We conduct a simulation study to evaluate the time series ICA model under different time structure assumptions about the underlying components that generate financial time series. Moreover, the empirical results support the use of the time series ICA model.
Author: Pujin Liu Publisher: ISBN: Category : Languages : en Pages : 286
Book Description
The thesis consists of three essays dealing with the modeling of volatility in financial markets, trade durations, and Value-at-Risk (VaR). The first essay models nonlinearities in the return series to estimate time-varying volatility by incorporating both regime changes and jumps. Two types of regime-switching GARCH-jump models with autoregressive jump intensity are presented. The first model follows the traditional Markov regime-switching model proposed in Hamilton (1989). As the unknown regimes in the Markov model lead to difficulty in forecasting, a threshold GARCH-jump model, in which regimes are known after observing the threshold variable in the previous period, is also proposed. The second essay models the intraday durations between two adjacent trade transactions by considering the impact of unaccounted struc- tural changes on parameter estimates. Monte Carlo simulations show that the observed high persistence in trade durations can be spurious and caused by unaccounted structural changes in the data generating process. The third essay investigates the use of realized moments in VaR forecasting, which is an important issue in risk management. Many VaR models rely only on the mean and volatility and ignore higher moments of returns, which leads to un- derestimation of VaR due to the unaccounted fat-tail property of the return series. Applying the Cornish-Fisher expansion to incorporate realized higher moments constructed from high frequency data, the proposed realized moment models outperform the realized volatility model and the traditional RiskMet- rics model, especially during the financial crisis period (2008-09).
Author: Waleem Babatunde Alausa Publisher: ISBN: Category : Econometrics Languages : en Pages : 237
Book Description
The overall purpose of this thesis is to extend and apply the Markov Switching Multifractal (MSM) model to various economic problems. To this extent, Chapter 1 lays the ground work for the next chapters by reviewing the MSM model, discussing its properties and outlining its estimation procedures. The chapter also reviews the distributional properties of several commodity markets that make them amenable to the MSM model. Chapter 2 extends the MSM model by incorporating a vector error correction component, which includes in the conditional mean equation, the cointegrating relationship between spot and futures prices. The VECM-MSM model has two distinctive features that incorporate the empirical properties of asset prices. First, it includes an error correction mechanism in the mean equation that incorporates the long-run relationship between spot and futures prices. Second, the model specifies the conditional second moments as a bivariate Markov Switching Multifractal (MSM) model. The VECM-MSM model is applied to study the problem of risk hedging in the futures market. The hedging effectiveness of the proposed VECM-MSM model is evaluated, using a value-at-risk (VaR) approach. Specifically, we compare the hedging effectiveness of the proposed model to those of alternative models by assessing their unconditional and conditional VaR coverages. Models are then ranked in terms of the adequacy and accuracy of their hedged portfolio VaR. The in-sample and out-of-sample hedge effectiveness shows that the VECM-MSM hedged portfolio outperforms alternative hedging strategies in terms of having the lowest rate of VaR violations among the different strategies. Statistical tests of unconditional and conditional coverages also show that the VECM-MSM model better predicts an investor's downside risk in that the VaR predictions are more accurate than the predictions from the alternative models. Chapter 3 of this thesis investigates the excess commodity comovement phenomenon, using the MSM model. One of the stylized facts of commodity prices is their tendency for comovement. The phenomenon implies that seemingly unrelated commodities tend to move together beyond what can be attributed to fundamentals, such as demand and supply conditions, exchange rates, interest rates, industrial production etc. Excess commodity comovement bears significant welfare and risk management implications. For an instance, a synchronous rise in prices of commodities exerts significant inflationary pressure on commodity import dependent countries, and limits their ability to maintain economic stability and resist inflationary pressures. Moreover, to the extent that comovement measures, such as correlation and covariance among commodities, comprise an essential ingredient in risk assessment, pricing, portfolio management and hedging, failure to account for such excess comovement can lead to sub-optimal economic decisions. Therefore within the debate on excess commodity comovement, the objective of this chapter is twofold. First, it analyzes the degree of excess commodity comovement across a variety of commodities. Second, it analyzes the frequency-dependent nature of comovement across related (e.g. crude and heating oil) and unrelated commodities (e.g. copper and corn). First, we find that there is significant comovement between commodity prices, beyond what can simply be explained by macroeconomic fundamentals. Second, decomposing comovements into multiple frequencies, we find that all commodities exhibit long-run excess comovements which are driven by low frequency fundamentals such as weather, demographic and macroeconomic factors. But some commodities also exhibit significant short-run excess comovements that may be attributable to short-run factors such as liquidity constraints, indexation, etc. Third, the dynamic correlations show that excess comovements are higher in periods of high volatility and vice-versa. The final chapter applies a new class of model, the Autoregressive Markov switching multifractal model, for forecasting spot electricity prices. Three variants of the model are examinedEmploying hourly prices from the AESO market, the parameters of the ARX-MSM models are estimated, and one-step-ahead hourly forecasts are obtained. To put the performance of the ARX-MSM models into perspective, the results are compared to those of other notable models used in the literature, namely the AR(1), ARX, ARX-GARCH, mean-reverting jump and the 2-state independent Markov regime switching models. Goodness-of-fit tests indicate that the ARX-MSM models fit the data significantly better than the competing models. Likewise, out-of-sample results show that the ARX-MSM models provide better forecast accuracy.
Author: Juri Marcucci Publisher: ISBN: Category : Dow Jones industrial average Languages : en Pages : 162
Book Description
This dissertation contains three self-contained chapters dealing with volatility modeling and forecasting. In the first chapter we compare a set of standard GARCH models with a group of Markov Regime-Switching GARCH (MRS-GARCH) in terms of their ability to forecast the US stock market volatility at horizons that range from one day to one month. The empirical analysis demonstrates that MRS-GARCH models do really outperform all standard GARCH models in forecasting volatility at horizons shorter than one week. In particular, all tests reject the presence of a better model than the MRS-GARCH with normal innovations. However, at forecast horizons longer than one week, standard asymmetric GARCH models tend to be superior. In chapter 2 a new model to analyze the comovements in the volatilities of a portfolio is proposed. The Pure Variance Common Features model is a factor model for the conditional variances of a portfolio of assets, designed to isolate a small number of variance features that drive all assets' volatilities. It decomposes the conditional variance into a short-run idiosyncratic component (a low-order ARCH process) and a long-run component (the variance factors). An empirical example provides evidence that models with very few variance features perform well in capturing the long-run common volatilities of the equity components of the Dow Jones. In the third and last chapter we compare standard univariate models and multivariate factor models in terms of their ability to forecast the realized variances of a group of major international stock exchanges. Our results show that those models adopting equally weighted regional factors outperform all the others. In addition, models that use factors obtained from canonical correlation analysis tend to outperform all the others that employ different multivariate techniques, therefore confirming their predicting power.
Author: Niels Haldrup Publisher: OUP Oxford ISBN: 0191669547 Category : Business & Economics Languages : en Pages : 393
Book Description
This edited collection concerns nonlinear economic relations that involve time. It is divided into four broad themes that all reflect the work and methodology of Professor Timo Teräsvirta, one of the leading scholars in the field of nonlinear time series econometrics. The themes are: Testing for linearity and functional form, specification testing and estimation of nonlinear time series models in the form of smooth transition models, model selection and econometric methodology, and finally applications within the area of financial econometrics. All these research fields include contributions that represent state of the art in econometrics such as testing for neglected nonlinearity in neural network models, time-varying GARCH and smooth transition models, STAR models and common factors in volatility modeling, semi-automatic general to specific model selection for nonlinear dynamic models, high-dimensional data analysis for parametric and semi-parametric regression models with dependent data, commodity price modeling, financial analysts earnings forecasts based on asymmetric loss function, local Gaussian correlation and dependence for asymmetric return dependence, and the use of bootstrap aggregation to improve forecast accuracy. Each chapter represents original scholarly work, and reflects the intellectual impact that Timo Teräsvirta has had and will continue to have, on the profession.
Author: André Oliveira Santos
Author: André Oliveira Santos
Author: Lorenzo Cappiello
Author: Yanlin Shi
Author: Jing Wu (Ph. D.)
Author: Pujin Liu
Author: Waleem Babatunde Alausa
Author: Juri Marcucci
Author: Wei-Choun Yu
Author: Niels Haldrup
Author: Isao Ishida