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

Abstract

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

Massacci, Daniele, A Two-Regime Threshold Model with Conditional Skewed Student t Distributions for Stock Returns (April 8, 2014). Available at SSRN: https://ssrn.com/abstract=2212627 or http://dx.doi.org/10.2139/ssrn.2212627

Daniele Massacci (Contact Author)

King's College London ( email )

United Kingdom

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