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A novel approach to modelling the distribution of financial returns

Author

Listed:
  • Yuzhi Cai

    (School of Management, Swansea University)

  • Guodong Li

    (University of Hong Kong)

Abstract

We develop a novel quantile function threshold GARCH model for studying the distribution function, rather than the volatility function, of financial returns that follow a threshold GARCH model. We propose a Bayesian method to do estimation and forecasting simultaneously, which allows us to handle multiple thresholds easily and ensures the forecasts can take account of the variation of model parameters. We apply the method to simulated data and Nasdaq returns. We show that our model is robust to model specification errors and outperforms some commonly used threshold GARCH models.

Suggested Citation

  • Yuzhi Cai & Guodong Li, 2018. "A novel approach to modelling the distribution of financial returns," Working Papers 2018-22, Swansea University, School of Management.
    • Handle: RePEc:swn:wpaper:2018-22
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    File URL: https://rahwebdav.swan.ac.uk/repec/pdf/WP2018-22.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Density forecasts; financial returns; quantile function; threshold GARCH;
    All these keywords.

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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