STYLIZED FACTS OF DAILY RETURN SERIES AND THE HIDDEN MARKOV MODEL

Citation
T. Ryden et al., STYLIZED FACTS OF DAILY RETURN SERIES AND THE HIDDEN MARKOV MODEL, Journal of applied econometrics, 13(3), 1998, pp. 217-244
Citations number
23
Categorie Soggetti
Economics,"Social Sciences, Mathematical Methods
ISSN journal
08837252
Volume
13
Issue
3
Year of publication
1998
Pages
217 - 244
Database
ISI
SICI code
0883-7252(1998)13:3<217:SFODRS>2.0.ZU;2-P
Abstract
In two recent papers, Granger and Ding (1995a,b) considered long retur n series that are first differences of logarithmed price series or pri ce indices. They established a set of temporal and distributional prop erties for such series and suggested that the returns are well. charac terized by the double exponential distribution. The present paper show s that a mixture of normal variables with zero mean can generate serie s with most of the properties Granger and Ding singled out. In that ca se, the temporal higher-order dependence observed in return series may be described by a hidden Markov model. Such a model is estimated for ten subseries of the well-known S&P 500 return series of about 17,000 daily observations. It reproduces the stylized facts of Granger and Di ng quite well, but the parameter estimates of the model sometimes vary considerably from one subseries to the next. The implications of thes e results are discussed. (C) 1998 John Wiley & Sons, Ltd.