Applications of State Space Models in finance

Abstract

List of figures2.1 Hierarchical cluster dendrogram for the set of excess sector returns. . . .2.2 Summaries of the weekly returns on the (i) broad market, (ii) the Insurance sector and (iii) Food & Beverages. . . . . . . . . . . . . . . . . . .2.3 Autocorrelation functions of the broad market, the Insurance sector and Food & Beverages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2.4 CUSUMSQ tests with 5% confidence intervals for the excess return series of (a) Insurance and (b) Food & Beverages. . . . . . . . . . . . . . . . .4.1 (a) Weekly percentage log-return series of the Technology sector and (b) histogram with a fitted normal distribution. . . . . . . . . . . . . . .4.2 Histogram of weekly log-returns of the Technology sector and fitted mixtures with (a) two and (b) three normal distributions. . . . . . . . . . .4.3 Basic structure of a hidden Markov model. . . . . . . . . . . . . . . . .6.1 Conditional volatility estimates for the Telecommunications sector. . . .6.2 Weekly excess log-return series of (a) Automobiles and (b) the broad market. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6.3 (a) Residuals from the auxiliary heteroskedastic regression model and (b) GLS weighting factor for Automobiles and the overall market. . . .6.4 Weighted weekly excess log-return series of (a) Automobiles and (b) the broad market. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6.5 Conditional random walk and generalized random walk beta estimates for the Automobiles sector. . . . . . . . . . . . . . . . . . . . . . . . . .6.6 Boxplots of the conditional beta series for the Insurance sector. . . . . .6.7 t-GARCH and stochastic volatility based betas for the Insurance sector.6.8 Markov switching betas for the Insurance sector. . . . . . . . . . . . . .6.9 Kalman filter betas for the Insurance sector. . . . . . . . . . . . . . . . .6.10 In-sample forecasting evaluation: (a) average MAE and MSE across sectors and (b) average ranks across sectors. . . . . . . . . . . . . . . . . .6.11 Histograms of Spearman's in-sample rank correlations. . . . . . . . . . .6.12 Out-of-sample forecasting evaluation (100 samples): (a) average MAE and MSE across sectors and (b) average ranks across sectors. . . . . . .6.13 Histograms of Spearman's out-of-sample rank correlations (100 samples).

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