Communications for Statistical Applications and Methods

The Korean Statistical Society (한국통계학회)
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Bayesian analysis of financial volatilities addressing long-memory, conditional heteroscedasticity and skewed error distribution

  • Oh, Rosy (Department of Statistics, Ewha Womans University) ;
  • Shin, Dong Wan (Department of Statistics, Ewha Womans University) ;
  • Oh, Man-Suk (Department of Statistics, Ewha Womans University)
  • Received : 2017.07.06
  • Accepted : 2017.08.17
  • Published : 2017.09.30
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Abstract

Volatility plays a crucial role in theory and applications of asset pricing, optimal portfolio allocation, and risk management. This paper proposes a combined model of autoregressive moving average (ARFIMA), generalized autoregressive conditional heteroscedasticity (GRACH), and skewed-t error distribution to accommodate important features of volatility data; long memory, heteroscedasticity, and asymmetric error distribution. A fully Bayesian approach is proposed to estimate the parameters of the model simultaneously, which yields parameter estimates satisfying necessary constraints in the model. The approach can be easily implemented using a free and user-friendly software JAGS to generate Markov chain Monte Carlo samples from the joint posterior distribution of the parameters. The method is illustrated by using a daily volatility index from Chicago Board Options Exchange (CBOE). JAGS codes for model specification is provided in the Appendix.

Keywords

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