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Stochastic Multivariate Mixture Covariance Model
Author(s) -
So Mike K. P.,
Li Raymond W. M.,
Asai Manabu,
Jiang Yue
Publication year - 2017
Publication title -
journal of forecasting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.543
H-Index - 59
eISSN - 1099-131X
pISSN - 0277-6693
DOI - 10.1002/for.2419
Subject(s) - covariance , model selection , markov chain monte carlo , mixture model , econometrics , computer science , stochastic modelling , markov chain , bayesian probability , multivariate statistics , statistics , mathematics , artificial intelligence , machine learning
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.