Testing of binary regime switching models using squeeze duration analysis

Milan Kumar Das () and Anindya Goswami
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Milan Kumar Das: Mathematical Sciences, Indian Institute of Science Education and Research, Pune, India
Anindya Goswami: Mathematical Sciences, Indian Institute of Science Education and Research, Pune, India

International Journal of Financial Engineering (IJFE), 2019, vol. 06, issue 01, 1-20

Abstract: We have developed a statistical technique to test the model assumption of binary regime switching extension of the geometric Brownian motion (GBM) model by proposing a new discriminating statistics. Given a time series data, we have identified an admissible class of the regime switching candidate models for the statistical inference. By performing several systematic experiments, we have successfully shown that the sampling distribution of the test statistics differs drastically, if the model assumption changes from GBM to Markov modulated GBM, or to semi-Markov modulated GBM. Furthermore, we have implemented this statistics for testing the regime switching hypothesis with Indian sectoral indices.

Keywords: Empirical volatility; regime switching GBM; time series analysis; parameter inference (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (2)

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DOI: 10.1142/S2424786319500063

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