Comparative Bayesian Analysis of GARCH and Stochastic Volatility Models using R and Stan

Authors

Muhammed Navas T, Department of Mathematics, National Institute of Technology, Calicut, IndiaFollow
Mosab I. Tabash, College of Business, Al Ain University, UAEFollow
Shazia Farhin, Department of Statistics and Operations Research Aligarh Muslim University, Aligarh, IndiaFollow
Athar Ali Khan, Department of Statistics and Operations Research Aligarh Muslim University, Aligarh, IndiaFollow

Author Country (or Countries)

India

Abstract

This study uses modelling and model comparison to compare three widely used GARCH models with their stochastic volatility (SV) counterparts in modelling the dynamics of inflation rates using the Bayesian approach. BRICS country consumer price index (CPI) data are used to assess these models. We find that the stochastic volatility models perform better than the GARCH models most of the time. The stochastic volatility in the leverage (SV-L) model is also demonstrated to be the most effective for the BRICS nations that we took into consideration. The article also looks at which model attributes are crucial in simulating inflation rates. It turns out that when modelling inflation rates, inflation volatility feedback is an important component to take into account. For each of the five countries we took into consideration, SV-L outperforms all other models. The study was done in rstan, a programming language for statistical inference, and the simulation uses the Hamiltonian Monte Carlo (HMC) algorithm of the Markov chain Monte Carlo (MCMC) to sample from the posterior distribution.

Digital Object Identifier (DOI)

http://dx.doi.org/10.18576/jsap/12S109

Recommended Citation

Navas T, Muhammed; I. Tabash, Mosab; Farhin, Shazia; and Ali Khan, Athar (2023) "Comparative Bayesian Analysis of GARCH and Stochastic Volatility Models using R and Stan," Journal of Statistics Applications & Probability: Vol. 12: Iss. 4, Article 9.
DOI: http://dx.doi.org/10.18576/jsap/12S109
Available at: https://digitalcommons.aaru.edu.jo/jsap/vol12/iss4/9