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A mixture autoregressive model based on Student’s t–distribution

Mika Meitz (), Daniel Preve and Pentti Saikkonen ()
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Mika Meitz: University of Helsinki

No GRU_2018_013, GRU Working Paper Series from City University of Hong Kong, Department of Economics and Finance, Global Research Unit

Abstract: A new mixture autoregressive model based on Student’s t–distribution is proposed. A key feature of our model is that the conditional t–distributions of the component models are based on autoregressions that have multivariate t–distributions as their (low-dimensional) stationary distributions. That autoregressions with such stationary distributions exist is not immediate. Our formulation implies that the conditional mean of each component model is a linear function of past observations and the conditional variance is also time varying. Compared to previous mixture autoregressive models our model may therefore be useful in applications where the data exhibits rather strong conditional heteroskedasticity. Our formulation also has the theoretical advantage that conditions for stationarity and ergodicity are always met and these properties are much more straightforward to establish than is common in nonlinear autoregressive models. An empirical example employing a realized kernel series based on S&P 500 high-frequency data shows that the proposed model performs well in volatility forecasting.

Keywords: Conditional heteroskedasticity; mixture model; regime switching; Student’s t–distribution (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm
Date: 2018-06-21
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Working Paper: A mixture autoregressive model based on Student's $t$-distribution (2018) Downloads
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