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"
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: C58 C22 G01 (search for similar items in EconPapers)
Pages: 26 pages
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-ore
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Persistent link: https://EconPapers.repec.org/RePEc:fir:econom:wp2016_02
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