Regime-Switching and the Estimation of Multifractal Processes

Laurent Calvet and Adlai Fisher

No 1999, Harvard Institute of Economic Research Working Papers from Harvard - Institute of Economic Research

Abstract: We propose a discrete-time stochastic volatility model in which regimeswitching serves three purposes. First, changes in regimes capture low frequency variations, which is their traditional role. Second, they specify intermediate frequency dynamics that are usually assigned to smooth autoregressive processes. Finally, high frequency switches generate substantial outliers. Thus, a single mechanism captures three important features of the data that are typically addressed as distinct phenomena in the literature. Maximum likelihood estimation is developed and shown to perform well in finite sample. We estimate on exchange rate data a version of the process with four parameters and more than a thousand states. The estimated model compares favorably to earlier specifications both in- and out-of-sample. Multifractal forecasts slightly improve on GARCH(1,1) at daily and weekly intervals, and provide considerable gains in accuracy at horizons of 10 to 50 days.

Date: 2003
References: Add references at CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
http://www.economics.harvard.edu/pub/hier/2003/HIER1999.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www.economics.harvard.edu/pub/hier/2003/HIER1999.pdf [301 Moved Permanently]--> https://www.economics.harvard.edu/pub/hier/2003/HIER1999.pdf)

Related works:
Working Paper: Regime-Switching and the Estimation of Multifractal Processes (2003)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fth:harver:1999

Access Statistics for this paper

More papers in Harvard Institute of Economic Research Working Papers from Harvard - Institute of Economic Research Contact information at EDIRC.
Bibliographic data for series maintained by Thomas Krichel ().