A Two-Regime Threshold Model with Conditional Skewed Student t Distributions for Stock Returns
25 Pages Posted: 6 Feb 2013 Last revised: 19 Apr 2017
Date Written: April 8, 2014
This paper proposes a two-regime threshold model for the conditional distribution of stock returns in which returns follow a distinct skewed Student t distribution within each regime: the model allows to capture time variation in the conditional distribution of returns, as well as higher order moments. An application of the model to daily U.S. stock returns illustrates the advantages of the proposed model in comparison to alternative specifications: the model performs well in terms of in-sample fit; it more accurately estimates the conditional volatility; and it produces useful risk assessment as measured by the term structure of value at risk.
Keywords: Threshold Model, Skewed Student t Distribution, Stock Returns, Value at Risk
JEL Classification: C22, G12
Suggested Citation: Suggested Citation