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VOLATILITY ANALYSIS OF REGIME-SWITCHING MODELS

Published online by Cambridge University Press:  08 May 2020

Yue LiuOpen the ORCID record for Yue Liu[Opens in a new window],
Zhuyun Xie,
Jingjing Yao and
Kaodui Li
Yue Liu
Affiliation:
School of Finance and Economics, Jiangsu University, Zhenjiang, Jiangsu, China. E-mail: liuy0080@e.ntu.edu.sg
Zhuyun Xie
Affiliation:
School of Finance and Economics, Jiangsu University, Zhenjiang, Jiangsu, China. E-mail: liuy0080@e.ntu.edu.sg
Jingjing Yao
Affiliation:
School of Finance and Economics, Jiangsu University, Zhenjiang, Jiangsu, China. E-mail: liuy0080@e.ntu.edu.sg
Kaodui Li
Affiliation:
School of Finance and Economics, Jiangsu University, Zhenjiang, Jiangsu, China. E-mail: liuy0080@e.ntu.edu.sg
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Abstract

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This paper investigates the volatility in regime-switching models formulated based on the geometric Brownian motion with its drift and volatility factors randomized with Markov chains. By developing explicit formulas about occupation time of Markov chains, we analysis the difference between global volatility of this model and the volatility caused by Brownian randomness, in order to measure the volatility caused by regime-switching after justifying its existence. Utilizing this structure of volatility, we optimize the methods of volatility parameters estimation.

Keywords

Markov chainsregime-switching modelvolatility analysis

Information

Type
Research Article
Information
Probability in the Engineering and Informational Sciences , Volume 35 , Issue 4 , October 2021, pp. 928 - 941
Copyright
Copyright © The Author(s), 2020. Published by Cambridge University Press

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