Markov Switching in GARCH Processes and Mean-Reverting Stock-Market Volatility |
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Authors: | Michael J Dueker |
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Institution: | Federal Reserve Bank of St. Louis , St. Louis , MO , 63166 |
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Abstract: | This article introduces four models of conditional heteroscedasticity that contain Markov-switching parameters to examine their multiperiod stock-market volatility forecasts as predictions of options-implied volatilities. The volatility model that best predicts the behavior of the options-implied volatilities allows the Student-t degrees-of-freedom parameter to switch such that the conditional variance and kurtosis are subject to discrete shifts. The half-life of the most leptokurtic state is estimated to be a week, so expected market volatility reverts to near-normal levels fairly quickly following a spike. |
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Keywords: | Asset-price volatility Conditional heteroscedasticity Kurtosis |
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