Markov switching in GARCH processes and mean reverting stock market volatility

Michael Dueker

No 1994-015, Working Papers from Federal Reserve Bank of St. Louis

Abstract: This paper introduces four models of conditional heteroskedasticity that contain markov switching parameters to examine their multi-period stock-market volatility forecasts as predictions of options-implied volatilities. The volatility model that best predicts the behavior of the optionsimplied volatilities allows the student-t degrees-of-freedom parameter to switch such that the conditional variance and kurtosis are subject to discrete shifts. The half-life of the most leptokurtic state is estimated to be weak, so expected market volatility reverts to near-normal levels fairly quickly following a spike.

Keywords: Stock; market (search for similar items in EconPapers)
Date: 1995
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Published in Journal of Business and Economic Statistics, January 1997

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Related works:
Journal Article: Markov Switching in GARCH Processes and Mean-Reverting Stock-Market Volatility (1997)
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