Refine
Year of publication
- 2013 (1)
Document Type
- Working Paper (1)
Language
- English (1)
Has Fulltext
- yes (1)
Is part of the Bibliography
- no (1)
Keywords
- Hidden State (1) (remove)
Institute
- Wirtschaftswissenschaften (1) (remove)
This paper compares two classes of models that allow for additional channels of correlation between asset returns: regime switching models with jumps and models with contagious jumps. Both classes of models involve a hidden Markov chain that captures good and bad economic states. The distinctive feature of a model with contagious jumps is that large negative returns and unobservable transitions of the economy into a bad state can occur simultaneously. We show that in this framework the filtered loss intensities have dynamics similar to self-exciting processes. Besides, we study the impact of unobservable contagious jumps on optimal portfolio strategies and filtering.