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Triple Regime Stochastic Volatility Model with Threshold and Leverage Effects

Heejoon Han and Eunhee Lee
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Heejoon Han: Sungkyunkwan University
Eunhee Lee: Gyeongsang National University

Korean Economic Review, 2020, vol. 36, 481-509

Abstract: This study considers a new stochastic volatility model, in which the sign and magnitude of stock returns play roles in explaining a substantially detailed relationship between stock returns and volatility. The proposed model allows for threshold and leverage effects, and accommodates three regimes (i.e., large negative return; mid-range, including moderate negative and positive returns; and large positive return) to better capture the time-varying aspect of the leverage effect. Applications of the proposed model on the return series of the S&P 500 Index and Microsoft Corporation suggest that the relationship between stock returns and volatility depends on the magnitude of the returns and their signs. The comparison of the deviance information criterion for various stochastic volatility models reveals a good fit of the proposed model for the data.

Keywords: Stochastic Volatility Model; Leverage Effect; Threshold Effect; Multiple Regime; MCMC; Gibbs Sampling (search for similar items in EconPapers)
JEL-codes: C22 C50 G12 (search for similar items in EconPapers)
Date: 2020
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