Combining Markov Switching and Smooth Transition in Modeling Volatility: A Fuzzy Regime MEM

Giampiero Gallo () and Edoardo Otranto

No 2016_02, Econometrics Working Papers Archive from Universita' degli Studi di Firenze, Dipartimento di Statistica, Informatica, Applicazioni "G. Parenti"

Abstract: Volatility in financial markets alternates persistent turmoil and quiet periods. Modelling realized volatility time series requires a specification in which these sub-periods are adequately represented. Changes in regimes is a solution, but the question of whether transition between periods is abrupt or smooth remains open. We provide a new class of models with a set of parameters subject to abrupt changes in regime and another set subject to smooth transition changes. These models capture the possibility that regimes may overlap with one another ( fuzzy ). The empirical application is carried out on the volatility of four US indices.

Keywords: Volatility; Regime switching; Smooth transition; Forecasting; Turbulence; Multiplicative Error Models; MEM (search for similar items in EconPapers)
JEL-codes: C22 C58 G01 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2016-04
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://labdisia.disia.unifi.it/wp_disia/2016/wp_disia_2016_02.pdf First version, 2016-04 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fir:econom:wp2016_02

Access Statistics for this paper

More papers in Econometrics Working Papers Archive from Universita' degli Studi di Firenze, Dipartimento di Statistica, Informatica, Applicazioni "G. Parenti" Viale G.B. Morgagni, 59 - I-50134 Firenze - Italy. Contact information at EDIRC.
Bibliographic data for series maintained by Fabrizio Cipollini ().