Binomial Markov-Switching Multifractal model with Skewed t innovations and applications to Chinese SSEC Index

Yufang Liu, Weiguo Zhang and Junhui Fu

Physica A: Statistical Mechanics and its Applications, 2016, vol. 462, issue C, 56-66

Abstract: This paper presents the Binomial Markov-switching Multifractal (BMSM) model of asset returns with Skewed t innovations (BMSM-Skewed t for short), which considers the fat tails, skewness and multifractality in asset returns simultaneously. The parameters of BMSM-Skewed t model can be estimated by Maximum Likelihood (ML) methods, and volatility forecasting can be accomplished via Bayesian updating. In order to evaluate the performance of BMSM-Skewed t model, BMSM model with Normal innovations (BMSM-N), BMSM model with Student-t innovations (BMSM-t) and GARCH(1,1) models (GARCH-N, GARCH-t and GARCH-Skewed t) are chosen for comparison. Through empirical studies on Shanghai Stock Exchange Composite Index (SSEC), we find that for sample estimation, BMSM models outperform the GARCH(1,1) models through BIC and AIC rules, and BMSM-Skewed t performs the best among all the models due to its fat tails, skewness and multifractality. In addition, BMSM-Skewed t model dominates other models at most forecasting horizons for out-of-sample volatility forecasts in terms of MSE, MAE and SPA test.

Keywords: BMSM models; Volatility forecasting; Skewed t innovations (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378437116302825
Full text for ScienceDirect subscribers only. Journal offers the option of making the article available online on Science direct for a fee of $3,000

Related works:
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:eee:phsmap:v:462:y:2016:i:c:p:56-66

DOI: 10.1016/j.physa.2016.06.014

Access Statistics for this article

Physica A: Statistical Mechanics and its Applications is currently edited by K. A. Dawson, J. O. Indekeu, H.E. Stanley and C. Tsallis

More articles in Physica A: Statistical Mechanics and its Applications from Elsevier
Bibliographic data for series maintained by Catherine Liu ().