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On the estimation of regime-switching Lévy models

Author

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  • Chevallier Julien

    (Université Paris 8 (LED), 2 avenue de la Liberté, 93526 Saint-Denis Cedex, France)

  • Goutte Stéphane

    (Université Paris 8 (LED), 2 avenue de la Liberté, 93526 Saint-Denis Cedex, France)

Abstract

The regime-switching Lévy model combines jump-diffusion under the form of a Lévy process, and Markov regime-switching where all parameters depend on the value of a continuous time Markov chain. We start by giving general stochastic results. Estimation is performed following a two-step procedure. The EM-algorithm is extended to this new class of jump-diffusion regime-switching models. Simulations are proposed, alongside an empirical application dedicated to the study of financial and commodity time series. When comparing the results with (i) non regime-switching models, and (ii) continuous regime-switching models (where the Lévy process is replaced by a classic Brownian motion), the Lévy regime-switching model outperforms other competitors.

Suggested Citation

  • Chevallier Julien & Goutte Stéphane, 2017. "On the estimation of regime-switching Lévy models," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 21(1), pages 3-29, February.
    • Handle: RePEc:bpj:sndecm:v:21:y:2017:i:1:p:3-29:n:4
    DOI: 10.1515/snde-2016-0048
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    References listed on IDEAS

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    Cited by:

    1. Nikita Ratanov, 2020. "Kac–Lévy Processes," Journal of Theoretical Probability, Springer, vol. 33(1), pages 239-267, March.
    2. Endres, Sylvia & Stübinger, Johannes, 2018. "A flexible regime switching model with pairs trading application to the S&P 500 high-frequency stock returns," FAU Discussion Papers in Economics 07/2018, Friedrich-Alexander University Erlangen-Nuremberg, Institute for Economics.
    3. Krishnamurthy, Vikram & Leoff, Elisabeth & Sass, Jörn, 2018. "Filterbased stochastic volatility in continuous-time hidden Markov models," Econometrics and Statistics, Elsevier, vol. 6(C), pages 1-21.
    4. Klarl, Torben, 2020. "The response of CO2 emissions to the business cycle: New evidence for the U.S," Energy Economics, Elsevier, vol. 85(C).
    5. Shaw, Charles, 2018. "Regime-Switching And Levy Jump Dynamics In Option-Adjusted Spreads," MPRA Paper 94154, University Library of Munich, Germany, revised 27 May 2019.

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    More about this item

    Keywords

    jump-diffusion; Lévy process; Markov-switching model; stochastic processes;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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