Persistence of Averages in Financial Markov Switching Models: A Large Deviations Approach

36 Pages Posted: 19 Dec 2019

See all articles by Michael J. Stutzer

Michael J. Stutzer

University of Colorado at Boulder - Leeds School of Business

Date Written: August 5, 2019

Abstract

The behavior of time averages, or functions of them, is important in quantitative research. Over an investment horizon, both the time-averaged number of loan defaults and the time-averaged log gross returns from securities investment, a.k.a. the continuously compounded cumulative rate of return (CROR), are important random variables affecting the performance of loan and securities portfolios, respectively. In ergodic models, the randomness in such averages is eliminated only asymptotically. The statistical theory of Large Deviations provides simply computed and useful tools for analyzing this persistence, and is developed and applied to Markov Switching models of loan defaults and securities portfolio choice.

Keywords: Econophysics, Large Deviations, Markov Switching Models

JEL Classification: B26, C58, G11

Suggested Citation

Stutzer, Michael Jay, Persistence of Averages in Financial Markov Switching Models: A Large Deviations Approach (August 5, 2019). Available at SSRN: https://ssrn.com/abstract=3505614 or http://dx.doi.org/10.2139/ssrn.3505614

Michael Jay Stutzer (Contact Author)

University of Colorado at Boulder - Leeds School of Business ( email )

Boulder, CO 80309-0419
United States

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