Infinite-State Markov-Switching for Dynamic Volatility

Arnaud Dufays

Journal of Financial Econometrics, 2016, vol. 14, issue 2, 418-460

Abstract: Generalized auto-regressive conditional heteroskedastic model with changing parameters is specified using the sticky infinite hidden Markov-chain framework. Estimation by Bayesian inference determines the adequate number of regimes as well as the optimal specification (Markov-switching or change-point). The new provided algorithms are studied in terms of mixing properties and computational time. Applications highlight the flexibility of the model and compare it to existing parametric alternatives.

Date: 2016
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