Scandinavian Working Papers in Economics
Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)
No 233: Flexible Modeling of Conditional Distributions Using Smooth Mixtures of Asymmetric Student T Densities
Feng Li (), Mattias Villani and Robert Kohn
Additional contact information
Feng Li: Department of Statistics, Stockholm University, Postal: SE-106 91 Stockholm, Sweden
Mattias Villani: Research Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Robert Kohn: Economics, The University of New South Wales,, Postal: Australian School of Business , UNSW Sydney NSW 2052 , Australia , ,
Abstract: A general model is proposed for flexibly estimating the density of a continuous response variable conditional on a possibly high-dimensional set of covariates. The model is a finite mixture of asymmetric student-t densities with covariate dependent mixture weights. The four parameters of the components, the mean, degrees of freedom, scale and skewness, are all modelled as functions of the covariates. Inference is Bayesian and the computation is carried out using Markov chain Monte Carlo simulation. To enable model parsimony, a variable selection prior is used in each set of covariates and among the covariates in the mixing weights. The model is used to analyse the distribution of daily stock market returns, and shown to more accurately forecast the distribution of returns than other widely used models for financial data.
Keywords: Bayesian inference; Markov Chain Monte Carlo; Mixture of Experts; Variable selection; Volatility modeling.
27 pages, October 1, 2009
Full text files
wp233.pdf
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