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Simulation Evidence on Long Memory and Regime Switching in the Second Moment for Modelling of Financial Returns

Isaksson, Hans LU (2015) NEKN01 20151
Department of Economics
Abstract
It is well-known that long memory and regime switching in the first moment of a stochastic process are easily confused. But the relation between long memory in the second moment and regime switching in the second moment is less well understood. We perform a simulation study in which we assess the possibility to distinguish the two properties in the case that data with long memory in the second moment is generated as a FIGARCH(0,d,0)-process, and when regime switching is modelled by HMM with switching variance. Those model specifications are common in the modelling of financial returns, and conform to several well-known stylised facts of financial data. The simulation study lends evidence to the risk of confusing long memory and regime... (More)
It is well-known that long memory and regime switching in the first moment of a stochastic process are easily confused. But the relation between long memory in the second moment and regime switching in the second moment is less well understood. We perform a simulation study in which we assess the possibility to distinguish the two properties in the case that data with long memory in the second moment is generated as a FIGARCH(0,d,0)-process, and when regime switching is modelled by HMM with switching variance. Those model specifications are common in the modelling of financial returns, and conform to several well-known stylised facts of financial data. The simulation study lends evidence to the risk of confusing long memory and regime switching in the case studied. (Less)
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author
Isaksson, Hans LU
supervisor
organization
course
NEKN01 20151
year
type
H1 - Master's Degree (One Year)
subject
keywords
Long memory, Regime switching, HMM, FIGARCH, Simulation study, Returns
language
English
id
5277220
date added to LUP
2015-04-29 13:48:43
date last changed
2015-04-29 13:48:43
@misc{5277220,
  abstract     = {It is well-known that long memory and regime switching in the first moment of a stochastic process are easily confused. But the relation between long memory in the second moment and regime switching in the second moment is less well understood. We perform a simulation study in which we assess the possibility to distinguish the two properties in the case that data with long memory in the second moment is generated as a FIGARCH(0,d,0)-process, and when regime switching is modelled by HMM with switching variance. Those model specifications are common in the modelling of financial returns, and conform to several well-known stylised facts of financial data. The simulation study lends evidence to the risk of confusing long memory and regime switching in the case studied.},
  author       = {Isaksson, Hans},
  keyword      = {Long memory,Regime switching,HMM,FIGARCH,Simulation study,Returns},
  language     = {eng},
  note         = {Student Paper},
  title        = {Simulation Evidence on Long Memory and Regime Switching in the Second Moment for Modelling of Financial Returns},
  year         = {2015},
}