Marginal Likelihood for Markov-Switching and Change-Point GARCH Models

36 Pages Posted: 29 Nov 2011

See all articles by Luc Bauwens

Luc Bauwens

Université catholique de Louvain

Arnaud Dufays

Université catholique de Louvain, CORE

J. V. K. Rombouts

HEC Montreal; Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE); Centre interuniversitaire sur le risque, les politiques économiques et l'emploi (CIRPÉE); Center for Interuniversity Research and Analysis on Organization (CIRANO)

Date Written: November 28, 2011

Abstract

GARCH volatility models with fixed parameters are too restrictive for long time series due to breaks in the volatility process. Flexible alternatives are Markov-switching GARCH and change-point GARCH models. They require estimation by MCMC methods due to the path dependence problem. An unsolved issue is the computation of their marginal likelihood, which is essential for determining the number of regimes or change-points. We solve the problem by using particle MCMC, a technique proposed by Andrieu, Doucet, and Holenstein (2010). We examine the performance of this new method on simulated data, and we illustrate its use on several return series.

Keywords: Bayesian inference, Simulation, GARCH, Markov-switching model, Change-point model, Marginal likelihood, Particle MCMC

JEL Classification: C11, C15, C22, C58

Suggested Citation

Bauwens, Luc and Dufays, Arnaud and Rombouts, Jeroen, Marginal Likelihood for Markov-Switching and Change-Point GARCH Models (November 28, 2011). CIRANO - Scientific Publication No. 2011s-72, Available at SSRN: https://ssrn.com/abstract=1965660 or http://dx.doi.org/10.2139/ssrn.1965660

Luc Bauwens

Université catholique de Louvain ( email )

CORE
34 Voie du Roman Pays
B-1348 Louvain-la-Neuve, b-1348
Belgium
32 10 474321 (Phone)
32 10 474301 (Fax)

Arnaud Dufays

Université catholique de Louvain, CORE ( email )

Place Montesquieu, 3
Louvain-la-Neuve, 1348
Belgium

Jeroen Rombouts (Contact Author)

HEC Montreal ( email )

3000, Chemin de la Côte-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE) ( email )

34 Voie du Roman Pays
B-1348 Louvain-la-Neuve, b-1348
Belgium

Centre interuniversitaire sur le risque, les politiques économiques et l'emploi (CIRPÉE) ( email )

Pavillon De Sève
Ste-Foy, Quebec G1K 7P4
Canada

Center for Interuniversity Research and Analysis on Organization (CIRANO) ( email )

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Montreal H3C 3J7, Quebec
Canada

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