The study aims at a statistical verification of breaks in the
risk-return relationship for shares of individual companies quoted at
the Warsaw Stock Exchange. To this end a stochastic volatility model
incorporating Markov switching in-mean effect (SV-MS-M) is employed. We
argue that neglecting possible regime changes in the relation between
expected return and volatility within an ordinary SV-M specification may
lead to spurious insignificance of the risk premium parameter (as being
’averaged out’ over the regimes).Therefore, we allow the
volatility-in-mean effect to switch over different regimes according to
a discrete homogeneous two- or
three-state Markov chain. The
model is handled within Bayesian framework, which allows to fully
account for the uncertainty of
model parameters, latent conditional
variances and state variables. MCMC methods, including the Gibbs
sampler, Metropolis-Hastings algorithm and the
forward-filtering-backward-sampling scheme are suitably adopted to
obtain posterior densities of interest as well
as marginal data
density. The latter allows for a formal model comparison in terms of the
in-sample fit and, thereby, inference on the
’adequate’ number of
the risk premium regime
We test whether the floating exchange rates of the EU New Member States against the euro are determined jointly within the panel VEC framework. We find that the exchange rates of the Czech koruna, the Polish zloty and the Hungarian forint follow the same long-run relationship, in which the real exchange rates are explained by the real interest rates parities and the spreads of the credit default risk premiums. In case of the Romanian leu, the common relationship is rejected, which is likely due to differences in the economic setting. The results confirm that the currency markets of these three countries are closely related, since the appreciation/depreciation of one currency leads to similar movements in the other currencies of the NMS. The estimated misalignments exhibit some common patterns in terms of time spans and percentage values of under/overvaluation.
Forecasting yield curves with regime switches is important in academia and financial industry. As the number of interest rate maturities increases, it poses difficulties in estimating parameters due to the curse of dimensionality. To deal with such a feature, factor models have been developed. However, the existing approaches are restrictive and largely based on the stationarity assumption of the factors. This inaccuracy creates non-ignorable financial risks, especially when the market is volatile. In this paper, a new methodology is proposed to adaptively forecast yield curves. Specifically, functional principal component analysis (FPCA) is used to extract factors capable of representing the features of yield curves. The local AR(1) model with time-dependent parameters is used to forecast each factor. Simulation and empirical studies reveal the superiority of this method over its natural competitor, the dynamic Nelson-Siegel (DNS) model. For the yield curves of the U.S. and China, the adaptive method provides more accurate 6- and 12-month ahead forecasts.
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