Bayesian Model Selection for Heteroskedastic Models

31 Pages Posted: 28 May 2009 Last revised: 23 Oct 2009

See all articles by Cathy W. S. Chen

Cathy W. S. Chen

Feng Chia University - Department of Statistics; Graduate Institute of Statistics & Actuarial Science, Feng Chia University

Richard H. Gerlach

University of Sydney

Mike K. P. So

Hong Kong University of Science & Technology (HKUST) - Department of Information Systems, Business Statistics & Operations Management

Date Written: December 1, 2008

Abstract

It is well known that volatility asymmetry exists in financial markets. This paper reviews and investigates recently developed techniques for Bayesian estimation and model selection applied to a large group of modern asymmetric heteroskedastic models. These include the GJR-GARCH, threshold autoregression with GARCH errors, threshold GARCH and Double threshold heteroskedastic model with auxiliary threshold variables. Further we briefly review recent methods for Bayesian model selection, such as: reversible jump Markov chain Monte Carlo, Monte Carlo estimation via independent sampling from each model and importance sampling methods. Seven heteroskedastic models are then compared, for three long series of daily Asian market returns, in a model selection study illustrating the preferred model selection method. Major evidence of nonlinearity in mean and volatility is found, with the preferred model having a weighted threshold variable of local and international market news.

Keywords: asymmetric volatility model, Markov chain Monte Carlo, posterior model probability, parallel

JEL Classification: C11, C15, C22, C51, C52

Suggested Citation

Chen, Cathy W. S. and Gerlach, Richard H. and So, Mike K.P., Bayesian Model Selection for Heteroskedastic Models (December 1, 2008). Available at SSRN: https://ssrn.com/abstract=1410898 or http://dx.doi.org/10.2139/ssrn.1410898

Cathy W. S. Chen

Feng Chia University - Department of Statistics ( email )

100 Wen Hwa Road
Taichung, 407
Taiwan
886 4 24517250 ext 4412 (Phone)
886 4 24517092 (Fax)

HOME PAGE: http://myweb.fcu.edu.tw/~chenws/

Graduate Institute of Statistics & Actuarial Science, Feng Chia University

100 Wenhwa Road
Talchung
Taiwan
886 4-24517250 ext 4412 (Phone)
886 4-2517092 (Fax)

HOME PAGE: http://myweb.fcu.edu.tw/~chenws/

Richard H. Gerlach (Contact Author)

University of Sydney ( email )

Room 483, Building H04
University of Sydney
Sydney, NSW 2006
Australia
+ 612 9351 3944 (Phone)
+ 612 9351 6409 (Fax)

HOME PAGE: http://www.econ.usyd.edu.au/staff/richardg

Mike K.P. So

Hong Kong University of Science & Technology (HKUST) - Department of Information Systems, Business Statistics & Operations Management ( email )

Clear Water Bay, Kowloon
Hong Kong

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