Stochastic volatility models with leverage and heavy-tailed distributions: A Bayesian approach using scale mixtures
Joanna J.J. Wang,
Jennifer Chan and
S.T. Boris Choy ()
Computational Statistics & Data Analysis, 2011, vol. 55, issue 1, 852-862
This paper studies a heavy-tailed stochastic volatility (SV) model with leverage effect, where a bivariate Student-t distribution is used to model the error innovations of the return and volatility equations. Choy etÂ al. (2008) studied this model by expressing the bivariate Student-t distribution as a scale mixture of bivariate normal distributions. We propose an alternative formulation by first deriving a conditional Student-t distribution for the return and a marginal Student-t distribution for the log-volatility and then express these two Student-t distributions as a scale mixture of normal (SMN) distributions. Our approach separates the sources of outliers and allows for distinguishing between outliers generated by the return process or by the volatility process, and hence is an improvement over the approach of Choy etÂ al. (2008). In addition, it allows an efficient model implementation using the WinBUGS software. A simulation study is conducted to assess the performance of the proposed approach and its comparison with the approach by Choy etÂ al. (2008). In the empirical study, daily exchange rate returns of the Australian dollar to various currencies and daily stock market index returns of various international stock markets are analysed. Model comparison relies on the Deviance Information Criterion and convergence diagnostic is monitored by Geweke's convergence test.
Keywords: Stochastic; volatility; Scale; mixture; of; normal; Heavy; tails; Leverage; Outlier; diagnostics (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21) Track citations by RSS feed
Downloads: (external link)
Full text for ScienceDirect subscribers only.
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:eee:csdana:v:55:y:2011:i:1:p:852-862
Access Statistics for this article
Computational Statistics & Data Analysis is currently edited by S.P. Azen
More articles in Computational Statistics & Data Analysis from Elsevier
Bibliographic data for series maintained by Haili He ().