A mixture autoregressive model based on Student's $t$-distribution

TL;DR

This paper introduces a novel mixture autoregressive model based on Student's t-distribution, capable of capturing strong conditional heteroskedasticity and ensuring stationarity, with demonstrated effectiveness in volatility forecasting of financial data.

Contribution

The paper proposes a new mixture autoregressive model with Student's t-distributions, ensuring stationarity and ergodicity, and demonstrating improved volatility forecasting in financial data.

Findings

Model performs well in volatility forecasting.

Ensures stationarity and ergodicity conditions are met.

Effective in modeling data with strong heteroskedasticity.

Abstract

A new mixture autoregressive model based on Student's $t$-distribution is proposed. A key feature of our model is that the conditional $t$-distributions of the component models are based on autoregressions that have multivariate $t$-distributions as their (low-dimensional) stationary distributions. That autoregressions with such stationary distributions exist is not immediate. Our formulation implies that the conditional mean of each component model is a linear function of past observations and the conditional variance is also time varying. Compared to previous mixture autoregressive models our model may therefore be useful in applications where the data exhibits rather strong conditional heteroskedasticity. Our formulation also has the theoretical advantage that conditions for stationarity and ergodicity are always met and these properties are much more straightforward to establish than is common in nonlinear autoregressive models. An empirical example employing a realized kernel series based on S&P 500 high-frequency data shows that the proposed model performs well in volatility forecasting.