Skip to main content
Article thumbnail
Location of Repository

Bayesian inference on GARCH . . .

By Luc Bauwens and Michel Lubrano

Abstract

This paper explains how the Gibbs sampler can be used to perform Bayesian inference on GARCH models. Although the Gibbs sampler is usually based on the analytical knowledge of the full conditional posterior densities, such knowledge is not available in regression models with GARCH errors. We show that the Gibbs sampler can be combined with a unidimensional deterministic integration rule applied to each coordinate of the posterior density. The full conditional densities are evaluated and inverted numerically to obtain random draws of the joint posterior. The method is shown to be feasible and competitive compared with importance sampling and the Metropolis–Hastings algorithm. It is applied to estimate an asymmetric Student–GARCH model for the return on a stock exchange index, and to compute predictive option prices on the index. We prove, moreover, that a flat prior on the degrees of freedom parameter leads to an improper posterior density

Topics: Bayesian inference, GARCH, Gibbs sampler, Monte Carlo, Option pricing
Year: 1998
OAI identifier: oai:CiteSeerX.psu:10.1.1.135.5585
Provided by: CiteSeerX
Download PDF:
Sorry, we are unable to provide the full text but you may find it at the following location(s):
  • http://citeseerx.ist.psu.edu/v... (external link)
  • http://www.core.ucl.ac.be/econ... (external link)
  • Suggested articles


    To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.