Bayesian inference of multiple structural change models with asymmetric GARCH errors

Cathy W. S. Chen () and Bonny Lee
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Bonny Lee: Feng Chia University

Statistical Methods & Applications, 2021, vol. 30, issue 3, No 13, 1053-1078

Abstract: Abstract Structural change in any time series is practically unavoidable, and thus correctly detecting breakpoints plays a pivotal role in statistical modelling. This research considers segmented autoregressive models with exogenous variables and asymmetric GARCH errors, GJR-GARCH and exponential-GARCH specifications, which utilize the leverage phenomenon to demonstrate asymmetry in response to positive and negative shocks. The proposed models incorporate skew Student-t distribution and prove the advantages of the fat-tailed skew Student-t distribution versus other distributions when structural changes appear in financial time series. We employ Bayesian Markov Chain Monte Carlo methods in order to make inferences about the locations of structural change points and model parameters and utilize deviance information criterion to determine the optimal number of breakpoints via a sequential approach. Our models can accurately detect the number and locations of structural change points in simulation studies. For real data analysis, we examine the impacts of daily gold returns and VIX on S&P 500 returns during 2007–2019. The proposed methods are able to integrate structural changes through the model parameters and to capture the variability of a financial market more efficiently.

Keywords: Breakpoints; Structural change; Skew Student-t distribution; Segmented model; Markov chain Monte Carlo methods; Deviance information criterion (DIC) (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s10260-020-00549-z

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