Abstract
A Zero-drift GARCH (ZD-GARCH) model is recently proposed to study conditional and
unconditional heteroskedasticity together. Despite its attractive statistical properties, our
research demonstrates that the stability test based on this model fails when structural changes
are present. To overcome this issue, we allow the Markov regime-switching (MRS) feature
within the ZD-GARCH framework and propose an MRS-ZD-GARCH model. A revised
stability estimator is further derived. The effectiveness of our proposed approach to test the
stability with and without structural changes is evidenced via simulation studies. Using the
empirical data of the S&P 500, NASDAQ and Apple returns, we show that the new model
can also outperform the ZD-GARCH model in practice and provide more informative results.
Therefore, the MRS-ZD-GARCH model could be a widely useful tool to study the stability
of financial data and help address risk management issues in other contexts.
Original language | English |
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Pages (from-to) | 1-20 |
Number of pages | 20 |
Journal | Annals of Operations Research |
Volume | 330 |
Issue number | 1-2 |
Early online date | 1 Nov 2020 |
DOIs | |
Publication status | Published - Nov 2023 |
Keywords
- Heteroskedasticity
- Regime switching
- Volatility modelling
- Zero-drift GARCH