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http://dx.doi.org/10.5351/CSAM.2014.21.6.501

Regime-dependent Characteristics of KOSPI Return  

Kim, Woohwan (Financial Research & Implementation)
Bang, Seungbeom (Financial Research & Implementation)
Publication Information
Communications for Statistical Applications and Methods / v.21, no.6, 2014 , pp. 501-512 More about this Journal
Abstract
Stylized facts on asset return are fat-tail, asymmetry, volatility clustering and structure changes. This paper simultaneously captures these characteristics by introducing a multi-regime models: Finite mixture distribution and regime switching GARCH model. Analyzing the daily KOSPI return from $4^{th}$ January 2000 to $30^{th}$ June 2014, we find that a two-component mixture of t distribution is a good candidate to describe the shape of the KOSPI return from unconditional and conditional perspectives. Empirical results suggest that the equality assumption on the shape parameter of t distribution yields better discrimination of heterogeneity component in return data. We report the strong regime-dependent characteristics in volatility dynamics with high persistence and asymmetry by employing a regime switching GJR-GARCH model with t innovation model. Compared to two sub-samples, Pre-Crisis (January 2003 ~ December 2007) and Post-Crisis (January 2010 ~ June 2014), we find that the degree of persistence in the Pre-Crisis is higher than in the Post-Crisis along with a strong asymmetry in the low-volatility (high-volatility) regime during the Pre-Crisis (Post-Crisis).
Keywords
Finite mixture distribution; regime switching GJR-GARCH model; financial crisis; KOSPI;
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