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A novel approach to modelling the distribution of financial returns

Yuzhi Cai and Guodong Li
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Guodong Li: University of Hong Kong

No 2018-22, Working Papers from Swansea University, School of Management

Abstract: We develop a novel quantile function threshold GARCH model for studying the distribution function, rather than the volatility function, of financial returns that follow a threshold GARCH model. We propose a Bayesian method to do estimation and forecasting simultaneously, which allows us to handle multiple thresholds easily and ensures the forecasts can take account of the variation of model parameters. We apply the method to simulated data and Nasdaq returns. We show that our model is robust to model specification errors and outperforms some commonly used threshold GARCH models.

Keywords: Density forecasts; financial returns; quantile function; threshold GARCH (search for similar items in EconPapers)
JEL-codes: C10 C51 C53 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2018-02-27
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-for
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https://rahwebdav.swan.ac.uk/repec/pdf/WP2018-22.pdf First version, 2018 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:swn:wpaper:2018-22

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