A1009
Title: Extreme movements and volatility regimes: A latent factor regime switching perspective
Authors: Yuyi Li - University of Liverpool (United Kingdom) [presenting]
Ruijun Bu - University of Liverpool (United Kingdom)
Jie Cheng - Keele University (United Kingdom)
Abdoulkarim Idi cheffou - EDC Paris Business School (France)
Fredj Jawadi - University of Evry (France)
Abstract: The purpose is to empirically investigate asymmetric volatility regime switching in the context of extreme price movements, employing a novel latent-factor-driven endogenous regime-switching framework. The relationship is modeled between past shocks in observed returns and those in a latent factor using a copula function. This approach enables empirical capturing of more complex market features such as asymmetry, nonlinearity, and tail dependence in our endogeneity function. The empirical analysis extends to non-Gaussian state-dependent processes and state-dependent endogeneity, encompassing and expanding upon several existing endogenous regime-switching models. Through empirical study, the model is demonstrated to predict transitions from low to high volatility regimes more accurately than the symmetric model proposed in a past study. Findings suggest that symmetric models may significantly underestimate the likelihood of shifting to higher-risk regimes, particularly after substantial negative market shocks.
