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Apr 20

Forecast Volatility with Regime-Switching GARCH Models

Posted by abiao at 16:13 | Code » Matlab | Comments(6) | Reads(21559)
Volatility estimation and prediction is crucial for risk management, for example, the portfolio's Value at Risk (VaR) and expected shortfall are partly decided by your volatility estimated, by partly I mean other factors, like dependence structure decide their values as well. GARCH model is one of the popular models for volatility estimation, you might argue volatility regime should also be included to your model given the totally different performance (hence different parameters) between low volatility regime and high volatility regime. Here is a good paper comparing a set of different standard GARCH models with a group of Markov Regime-Switching GARCH (MRS-GARCH) in terms of their ability to forecast the US stock market volatility at horizons that range from one day to one month. To take into account the excessive persistence usually found in GARCH models that implies too smooth and too high volatility forecasts, in the MRS-GARCH models all parameters switch between a low and a high volatility regime. Both gaussian and fat-tailed conditional distributions for the residuals are assumed, and the degrees of freedom can also be state-dependent to capture possible time-varying kurtosis.

Download the paper and matlab codes at http://works.bepress.com/juri_marcucci/1/.
PS: In the codes the author multiply returns by 100 for optimization (hopefully for a faster convergence), I personally found the parameters are unstable with the change of this number. no idea if it is my data problem.

Update: The codes and package can now be downloaded at [url_nofollow=https://sites.google.com/site/jurimarcucci/publications/hints-for-mrsgarch-program][/url]

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thank you!

i would just like to know how did you specify the different regimes in your model? i haven't finished reading the paper yet.
you set the number of regimes you preferred (typically 2), and the codes automatically estimate which regime the current volatility is at with probability.
I'm looking for a MS GARCH code to make some data studies

could you please give me a working link

I've updated the link, thanks for reminding me.
I think the matlab files data and code are missing. Do u have full version?
I updated the link.
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