Theoretical and Applied Economics
No. 2 / 2017 (611), Summer
Modeling of stock indices with HMM-SV models
University of Lagos, Nigeria
J.T. WULU
University of Maryland University College, USA
Abstract. The use of volatility models to conduct volatility forecasting is gaining momentum in empirical literature. The performance of volatility persistence, as indicated by the estimated parameter φ, in Stochastic Volatility (SV) model is typically high. Since future values in SV models are based on the estimation of the parameters, this may lead to poor volatility forecasts. Furthermore, this high persistence, according to some research scientists, is due to the structure changes (e.g. shift of volatility levels) in the volatility processes, which SV model cannot capture. Hidden Markov Models (HMMs) allow for periods with different volatility levels characterized by the hidden states. This work deals with the problem by bringing in the SV model based on Hidden Markov Models (HMMs), called HMM-SV model. Via hidden states, HMMs allow for periods with different volatility levels characterized by the hidden states. Within each state, SV model is applied to model conditional volatility. Empirical analysis using the proposed HMM-SV models does not only address the structure changes, but also, provides better volatility forecasts and establishes an efficient forecasting structure for volatility modeling.
Keywords: forecasting, hidden Markov model, stochastic volatility, stock exchange.
Contents
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Roxana Mirela FERARU
- Using the input-output model in macroeconomic analysis
and forecasting studies
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Mădălina-Gabriela ANGHEL
- Panel causality analysis between exchange rates
and stock indexes for fragile five
Mehmet PEKKAYA
Ersin AÇIKGÖZ
Veli YILANCI
- Modeling of stock indices with HMM-SV models
E.B. NKEMNOLE
J.T. WULU
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in European Union (15 member states)
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for post-communist (transition) countries:
A panel causality analysis
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Murat ASLAN
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- The main correlations
between the monetary-banking indicators
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Ana CARP
- Impact of governance on budget deficit
in developing countries
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- An examination of bilateral J-curve:
Evidence from Turkey and her 20 major trading partners
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Linear and nonlinear unit root test evidence
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- Impact of GDP and tax revenue on health care financing:
An empirical investigation from Indian states
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- The relation between foreign direct investments
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- Economic freedom and foreign direct investment
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- An analysis of the effect of monetary policy
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- The costs of Brexit for UK economy
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