A Stochastic Volatility Model with GH Skew Student's t-Distribution: Application to Latin-American Stock Returns

Produced by: 
Pontificia Universidad Católica del Perú
Available from: 
July 2015
Paper author(s): 
Patricia Lengua Lafosse
Cristian Bayes
Topic: 
Environmental Economics
Year: 
2015

This paper presents an empirical study of a stochastic volatility (SV) model for daily stocks returns data of a set of Latin-American countries (Argentina, Brazil, Chile, Mexico and Peru) for the sample period 1996:01-2013:12. We estimate SV models incorporating both leverage effects and skewed heavy-tailed disturbances taking into account the GH Skew Student’s t-distribution using the Bayesian estimation method proposed by Nakajima and Omori (2012). A model comparison between the competing SV models with symmetric Student’s t-disturbances is provided using the log marginal likelihoods and a prior sensitivity analysis is also provided. The results suggest that there are leverage effects in all returns considered but there is not enough evidence for the case of Peru. Furthermore, skewed heavy-tailed disturbances are confirmed only for Argentina, symmetric heavy-tailed disturbances for Mexico, Brazil and Chile, and symmetric Normal disturbances for Peru. Furthermore, we find that the GH Skew Student’s t-disturbance distribution in the SV model is successful in describing the distribution of the daily stock return data for Peru, Argentina and Brazil over the traditional symmetric Student’s t-disturbance distribution.

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