Bayesian estimation of bandwidths for a nonparametric regression model with a flexible error density

Xibin Zhang (), Maxwell King and Han Lin Shang

No 10/11, Monash Econometrics and Business Statistics Working Papers from Monash University, Department of Econometrics and Business Statistics

Abstract: We approximate the error density of a nonparametric regression model by a mixture of Gaussian densities with means being the individual error realizations and variance a constant parameter. We investigate the construction of a likelihood and posterior for bandwidth parameters under this Gaussian-component mixture density of errors in a nonparametric regression. A Markov chain Monte Carlo algorithm is presented to sample bandwidths for the kernel estimators of the regression function and error density. A simulation study shows that the proposed Gaussian-component mixture density of errors is clearly favored against wrong assumptions of the error density. We apply our sampling algorithm to a nonparametric regression model of the All Ordinaries daily return on the overnight FTSE and S&P 500 returns, where the error density is approximated by the proposed mixture density. With the estimated bandwidths, we estimate the density of the one-step-ahead point forecast of the All Ordinaries return, and therefore, a distribution-free value-at-risk is obtained. The proposed Gaussian component mixture density of regression errors is also validated through the nonparametric regression involved in the state-price density estimation proposed by Aït-Sahalia and Lo (1998).

Keywords: Bayes factors; Gaussian-component mixture density; Markov chain Monte Carlo; state-price density; value-at-risk. (search for similar items in EconPapers)
JEL-codes: C11 C14 C15 G15 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2011-08-22
New Economics Papers: this item is included in nep-ecm, nep-for, nep-ore and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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