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- Title
A simulation study on the Markov regime-switching zero-drift GARCH model.
- Authors
Shi, Yanlin
- Abstract
A Zero-drift GARCH (ZD-GARCH) model is recently proposed to study conditional and unconditional heteroskedasticity together. Despite its attractive statistical properties, our research demonstrates that the stability test based on this model fails when structural changes are present. To overcome this issue, we allow the Markov regime-switching (MRS) feature within the ZD-GARCH framework and propose an MRS-ZD-GARCH model. A revised stability estimator is further derived. The effectiveness of our proposed approach to test the stability with and without structural changes is evidenced via simulation studies. Using the empirical data of the S&P 500, NASDAQ and Apple returns, we show that the new model can also outperform the ZD-GARCH model in practice and provide more informative results. Therefore, the MRS-ZD-GARCH model could be a widely useful tool to study the stability of financial data and help address risk management issues in other contexts.
- Subjects
GARCH model; NASDAQ Stock Market; APPLE Inc.; STANDARD &; Poor's 500 Index; HETEROSCEDASTICITY; FINANCIAL security; STRUCTURAL stability
- Publication
Annals of Operations Research, 2023, Vol 330, Issue 1/2, p1
- ISSN
0254-5330
- Publication type
Article
- DOI
10.1007/s10479-020-03832-0