Regime Switching GARCH : An Application to Dowjones Index Return

Hadiyat, M. Arbi and Iriawan, Nur and Mulyono, Slamet (2007) Regime Switching GARCH : An Application to Dowjones Index Return. Proceeding of 5th International Conference on Mathematics and Its Applications. ISSN ISBN: 978-979-95118-9-8

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Abstract

Since firstly proposed by Engle (1982) and Bollerslev (1986), ARCH-GARCH models have been used to describe volatility behaviors of time series, especially in stock market analysis. One of the weaknesses of ARCH-GARCH is its inability to model behavior transition between high volatilities and low volatilities. In this research, markov switching GARCH is investigated and applied to capture the presence of different volatility regimes, i.e. low volatilities regime and high volatility regime in Dowjones index return. However, there is no information to decide which observations belong to each of the regimes, and to account this difficulty, EM algorithm is applied for parameter estimation. The result shows that Dowjones index return includes two volatility regimes. The transition matrix of the model yields that low volatility regime is often happened than the high one.

Item Type: Article
Uncontrolled Keywords: GARCH, Markov Chain, Switching model, Mixture Normal, EM-Algorithm.
Subjects: Q Science > QA Mathematics
Divisions: Faculty of Engineering > Department of Industrial Engineering
Depositing User: M. Arbi Hadiyat 61135
Date Deposited: 30 Aug 2013 01:24
Last Modified: 30 Aug 2013 01:24
URI: http://repository.ubaya.ac.id/id/eprint/4452

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