Empirical analysis of stock indices under a regime-switching model with dependent jump size risks

Abstract

In this study, we propose a regime-switching model with dependent jump size risks to capture important characteristics of cyclical movements and abnormal shock events. We further demonstrate that the two-state model provides asymmetric and leptokurtic return features, and volatility clustering is observed empirically using 12 years of daily data for the S&P 500, Dow Jones Industrial Average (DJIA), and Nikkei 225 indices. In addition, our results indicate that the regime-switching model with dependent jump size risks is superior to the competing models.