Bayesian student-t

Abstract

The normal error distribution for the observations and log-volatilities in a stochastic volatility (SV) model is replaced by the Student-t distribution for robustness consideration. The model is then called the t-t SV model throughout this paper. The objectives of the paper are twofold. First, we introduce the scale mixtures of uniform (SMU) and the scale mixtures of normal (SMN) representations to the Student-t density and show that the setup of a Gibbs sampler for the t-t SV model can be simplified. For example, the full conditional distribution of the log-volatilities has a truncated normal distribution that enables an efficient Gibbs sampling algorithm. These representations also provide a means for outlier diagnostics. Second, we consider the so-called t SV model with leverage where the observations and log-volatilities follow a bivariate t distribution. Returns on exchange rates of Australian dollar to 10 major currencies are fitted by the t-t SV model and the t SV model with leverage, respectively.

Citation

Boris Choy, S.T., Wan, W.-y. and Chan, C.-m. (2008), "Bayesian student-t", Chib, S., Griffiths, W., Koop, G. and Terrell, D. (Ed.) Bayesian Econometrics (Advances in Econometrics, Vol. 23), Emerald Group Publishing Limited, Leeds, pp. 595-618. https://doi.org/10.1016/S0731-9053(08)23019-7