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Empirical analysis of stock indices under a regime-switching model with dependent jump size risks

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  • Hsu, Yuan-Lin
  • Lin, Shih-Kuei
  • Hung, Ming-Chin
  • Huang, Tzu-Hui

Abstract

In this study, we propose a regime-switching model with dependent jump size risks to capture important characteristics of cyclical movements and abnormal shock events. We further demonstrate that the two-state model provides asymmetric and leptokurtic return features, and volatility clustering is observed empirically using 12years of daily data for the S&P 500, Dow Jones Industrial Average (DJIA), and Nikkei 225 indices. In addition, our results indicate that the regime-switching model with dependent jump size risks is superior to the competing models.

Suggested Citation

  • Hsu, Yuan-Lin & Lin, Shih-Kuei & Hung, Ming-Chin & Huang, Tzu-Hui, 2016. "Empirical analysis of stock indices under a regime-switching model with dependent jump size risks," Economic Modelling, Elsevier, vol. 54(C), pages 260-275.
    • Handle: RePEc:eee:ecmode:v:54:y:2016:i:c:p:260-275
    DOI: 10.1016/j.econmod.2015.11.016
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