Does time-variation matter in the stochastic volatility components for G7 stock returns
Afees Salisu and
Ahamuefula Ogbonna ()
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Afees Salisu: Department for Management of Science and Technology Development, Ton Duc Thang University, Ho Chi Minh City, Vietnam Faculty of Business Administration, Ton Duc Thang University, Ho Chi Minh City, Vietnam Centre for Econometric and Allied Research, University of Ibadan
Ahamuefula Ogbonna: Centre for Econometric and Allied Research, University of Ibadan Department of Statistics, University of Ibadan, Ibadan, Nigeria
No 62, Working Papers from Centre for Econometric and Allied Research, University of Ibadan
This study empirically tests for time variation in the stochastic volatility (SV) components for the G7 stock returns. The time variation in both trend and transitory components of the SV is tested separately and jointly using the unobserved component model and following the approach developed by Chan (2018). Consequently, the computed Bayes factor obtained from the SavageDickey density ratio, which circumvents the computation of marginal likelihood, is used to adjudge the performance of each restricted time varying stochastic volatility model without the trend and transitory components against the unrestricted model that allows for same. The empirical evidence supports time variation in the transitory component of SV while the trend component is found to be relatively constant over time. These empirical estimates are not sensitive to data frequency.
Keywords: Bayesian; Bayes factor; Transitory component; Trend component; Unobserved Component Model (search for similar items in EconPapers)
JEL-codes: C11 C32 C53 E37 G17 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ets, nep-fmk, nep-for, nep-mac, nep-ore and nep-sea
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