MARKOV-SWITCHING GARCH MODELS IN R:

THE MSGARCH PACKAGE

Keven Bluteau

joint work with:

David Ardia
Kris Boudt
Leopoldo Catania
Brian Peterson
Denis-Alexandre Trottier

useR!2017, July 3-7

https://github.com/keblu/MSGARCH

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GO TO CRAN

– Problem:
No R package dealing with these kind of model in a generalized way.

– Solution:
Create one ! The MSGARCH package.

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IN BRIEF

– MSGARCH implements Haas et al. (2004a) specification:

1. K separate single-regime conditional variance processes.

2. Possibly K separate conditional distributions.
3. A Markov chain dictates the switches between regimes.
4. Assumes a zero mean process.

– Core of the package is in C++ (thanks to Rcpp) to allow for fast and
efficient computations.
– Easy estimation and specification creation (similar to rugarch).
– Functionality for visualization, simulation, model selection, and risk
measure forecasting.

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VOLATILITY MODELS

Bollerslev (1986)

Nelson (1991)

Glosten et al. (1993)

Zakoian (1994)

Creal et al. (2013)

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CONDITIONAL DISTRIBUTIONS

- Skewed versions also available using the Fernández and Steel (1998)
transformation.

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CREATING A SPECIFICATION

– First step is to create a specification

– Inputs:
– model: “sGARCH”, “eGARCH”, “gjrGARCH”,
“tGARCH”, “GAS”
– distribution: “norm”, “std”,“ged”
– do.skew: Skewed distribution Boolean.
– do.mix: Mixture of GARCH specification of Haas et al. (2004b).
– do.shape.ind: Make it so that only the conditional volatility
models switches (distribution and shape
parameter stays the same across regime).

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EXAMPLES

– Simple GARCH(1,1) normal:

– Two-state MSGARCH model with GARCH(1,1) normal in both

regimes:

– Complex MSGARCH model:

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WHAT IS INSIDE ?

– A specification is an S3 R class that gives you access to all the

MSGARCH functionalities.
– Embedded C++ templated class inside. Why ?
– C++ : Fast calculations of likelihood.
– Templated: Easy future extensions.
– This means adding conditional volatility models and conditional
distributions with minimal work (and debugging).

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TEMPLATED?

class Normal
{ … };

template<typename underlying>
class Skewed
{ … };

template <typename distribution>

class sGARCH
{ … };

template <typename Model>

class SingleRegime
{ … };

typedef SingleRegime <sGARCH <Skewed <Normal>>> sGARCH_norm_skew;

The MSgarch class takes a vector of K SingleRegime objects class as parameters.

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ILLUSTRATION – DATA

– SMI log-returns from 1990-11-12 to 2000-10-20.

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ILLUSTRATION – MLE ESTIMATION

– Make use of DEoptim (global) & nmkb from dfoptim (local)

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ILLUSTRATION – BAYESIAN ESTIMATION

– Make use of adaptMCMC

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AND SO WHAT?

– Available functionalities:
– Filtered volatilities.
– Filtered probabilities.
– N-step ahead simulation.
– Predictive density.
– Risk measures (VaR and ES).
– Information criteria.
– And more !

– All functionalities are compatible for both MLE and Bayesian estimation.

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ILLUSTRATION – VOLATILITIES & STATE

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PREDICTIVE DENSITY

1. Object can take a specification:

1. In case of a specification, theta and y must be provided.
2. Useful when using the same fitted model on new data y.
2. Object can take a fitted model:
1. No need to input theta and y.
2. Useful shortcut.
3. The variable x are what we want to evaluate.
4. If do.its = TRUE, x is not needed as we evaluated the function with the
in-sample observation (in-sample).
5. If do.its = FALSE, x is evaluated as a 1-step ahead draws.

Log-likelihood function: Use kernel() to include the

priors:

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ILLUSTRATION – PREDICTIVE DENSITY

MLE

MCMC

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ILLUSTRATION – RISK MEASURES

– The risk function works similarly to the pred function.

– It also leverages the pred function to calculate risk measures.
- do.its = TRUE will calculate the in-sample risk measures for all dates.
- do.its = FALSE will calculate the one-step ahead risk measures.

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WHAT NEXT?

– Google Summer of Code 2017 (Leopoldo Catania).

– Working paper where we demonstrate a large scale empirical study the advantage of
such model.
– Wish list:
– Improved starting value strategy for faster optimization.
– Multi-step ahead forecasts (by simulation).
– Parameters constraints.
– Standard errors of the estimates (MLE).
– Custom MLE and MCMC optimizers (including custom priors).
– Multivariate model with regime-switching copulas.
– And more!

Some are currently implemented in MSGARCH 0.19 (available on GitHub)!

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MSGARCH PACKAGE

Thanks for your attention and hope you’ll enjoy our package!!

https://CRAN.R-project.org/package=MSGARCH V. 0.17.7
https://github.com/keblu/MSGARCH V. 0.19.0

V. 1.00.0 and new documentation coming to CRAN this August !

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