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.
Contents
The role of fiscal policy in the financial crisis. Challenges and solutions
Using the input-output model in macroeconomic analysis and forecasting studies
Panel causality analysis between exchange rates and stock indexes for fragile five
Modeling of stock indices with HMM-SV models
The impact of private sector credit on income inequalities in European Union (15 member states)
Economic freedom, economic growth and international tourism for post-communist (transition) countries: A panel causality analysis
The main correlations between the monetary-banking indicators
Impact of governance on budget deficit in developing countries
Private equity market developments in central and Eastern Europe
Public-Private Partnerships for clean energy investment in developing and emerging economies: Allocating risks and sharing rewards
Science is measurement, yet not all sciences can be evaluated using the same measurement
The effects of real exchange rates and income on the trade balance: A second generation panel data analysis for transition economies and Turkey
Child policy changes and estimation of income distribution effects
An enquiry into the dynamics of real oil prices: A state space approach
Wage inequalities in Romania under successive adjustments in minimum wage levels
An examination of bilateral J-curve: Evidence from Turkey and her 20 major trading partners
Do military expenditures converge in NATO countries? Linear and nonlinear unit root test evidence
Impact of GDP and tax revenue on health care financing: An empirical investigation from Indian states
The relation between foreign direct investments and some economic indicators. The case of Romanian economy
Economic freedom and foreign direct investment in South Asian countries
New software for identification and evaluation of environmental and waste management in the companies
An analysis of the effect of monetary policy changes on macroeconomic factors
The costs of Brexit for UK economy