Stochastic Multivariate Mixture Covariance Model |
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| Authors: | Mike K P So Raymond W M Li Manabu Asai Yue Jiang |
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| Affiliation: | 1. Department of Information Systems, Business Statistics and Operations Management, Hong Kong University of Science and Technology, Hong Kong;2. Faculty of Economics, Soka University, Tokyo, Japan |
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| Abstract: | Stochastic covariance models have been explored in recent research to model the interdependence of assets in financial time series. The approach uses a single stochastic model to capture such interdependence. However, it may be inappropriate to assume a single coherence structure at all time t. In this paper, we propose the use of a mixture of stochastic covariance models to generalize the approach and offer greater flexibility in real data applications. Parameter estimation is performed by Bayesian analysis with Markov chain Monte Carlo sampling schemes. We conduct a simulation study on three different model setups and evaluate the performance of estimation and model selection. We also apply our modeling methods to high‐frequency stock data from Hong Kong. Model selection favors a mixture rather than non‐mixture model. In a real data study, we demonstrate that the mixture model is able to identify structural changes in market risk, as evidenced by a drastic change in mixture proportions over time. Copyright © 2016 John Wiley & Sons, Ltd. |
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| Keywords: | Bayesian model selection MCMC sampling mixture modeling stochastic covariance model |
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