Regime-Switching and the Estimation of Multifractal Processes

Laurent Calvet and Adlai Fisher

No 9839, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We propose a discrete-time stochastic volatility model in which regime switching serves three purposes. First, changes in regimes capture low frequency variations, which is their traditional role. Second, they specify intermediate frequency dynamics that are usually assigned to smooth autoregressive processes. Finally, high frequency switches generate substantial outliers. Thus, a single mechanism captures three important features of the data that are typically addressed as distinct phenomena in the literature. Maximum likelihood estimation is developed and shown to perform well in finite sample. We estimate on exchange rate data a version of the process with four parameters and more than a thousand states. The estimated model compares favorably to earlier specifications both in- and out-of-sample. Multifractal forecasts slightly improve on GARCH(1,1) at daily and weekly intervals, and provide considerable gains in accuracy at horizons of 10 to 50 days.

JEL-codes: C5 G0 (search for similar items in EconPapers)
Date: 2003-07
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-rmg
Note: EFG
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (20)

Published as Calvet, Laurent E. and Adlai J. Fisher. "How To Forecast Long-Run Volatility: Regime Switching And The Estimation Of Multifractal Processes," Journal of Financial Econometrics, 2004, v2(1,Winter), 49-83.

Downloads: (external link)
http://www.nber.org/papers/w9839.pdf (application/pdf)

Related works:
Working Paper: Regime-Switching and the Estimation of Multifractal Processes (2003)
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:nbr:nberwo:9839

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w9839

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().