Hidden Markov models with t components. Increased persistence and other aspects

Jan Bulla

Quantitative Finance, 2010, vol. 11, issue 3, 459-475

Abstract: Hidden Markov models have been applied in many different fields, including econometrics and finance. However, the lion's share of the investigated models concerns Markovian mixtures of Gaussian distributions. We present an extension to conditional t-distributions, including models with unequal distribution types in different states. It is shown that the extended models, on the one hand, reproduce various stylized facts of daily returns better than the common Gaussian model. On the other hand, robustness to outliers and persistence of the visited states increases significantly.

Keywords: Hidden Markov model; Markov-switching model; State persistence; t-distribution; Daily returns (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (9)

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Working Paper: Hidden Markov models with t components. Increased persistence and other aspects (2009)
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DOI: 10.1080/14697681003685563

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