On a buffered threshold autoregressive stochastic volatility model

Abstract

This article introduces a new autoregressive stochastic volatility (SV) model with a new piecewise linear structure such that the regime-switching mechanism has a buffer zone where regime-switching is delayed. The proposed model allows us to model the hysteretic phenomenon of the regime-switching existing on both the mean equation and the volatility equation. A full description of the proposed Markov chain Monte Carlo method is given. In the empirical study, we consider the daily closing prices of NIKKEI stock average, the exchange rate for US Dollar to Japanese Yen and Hang Seng Index. Deviance information criterion measure shows that our proposed model outperforms the classical threshold SV models.