Statistical Methods in Finance 2023

December 19 to 23, 2023



Functional-Coefficients Autoregressive Model with Stochastic Volatility: A Bayes Study

By Manika Agarwal
Banasthali Vidyapith, Rajasthan, India

An extension of the functional-coefficients autoregressive model given by Chen and Tsay (1993) with error term governed by a model representing stochastic volatility is proposed. The complete Bayesian analysis of the proposed model is done using the informative priors for the parameters in SV model. The functional-coefficients are approximated by polynomial splines with different orders to adapt different smoothness. The Gibbs sampler with intermediate Metropolis steps is used to find the corresponding sample based posterior inferences for the parameters of the proposed model. Also, the reversible jump Markov chain Monte Carlo technique is used to update the location and number of knots in polynomial spline. A real data set representing the exchange rate of Indian rupees relative to the US dollars is considered for numerical illustration after ensuring the stationarity of the data by differencing it once. Finally, the paper considers short term retrospective predictions of the data using the selected model.