Bayesian Analysis of the Functional-Coefficient Autoregressive Heteroscedastic Model

Abstract

In this paper, we propose a new model called the functional-coefficient autoregressive heteroscedastic (FARCH) model for nonlinear time series. The FARCH model extends the existing functional-coefficient autoregressive models and double-threshold autoregressive heteroscedastic models by providing a flexible framework for the detection of nonlinear features for both the conditional mean and conditional variance. We propose a Bayesian approach, along with the Bayesian P-splines technique and Markov chain Monte Carlo algorithm, to estimate the functional coefficients and unknown parameters of the model. We also conduct model comparison via the Bayes factor. The performance of the proposed methodology is evaluated via a simulation study. A real data set derived from the daily S&P 500 Composite Index is used to illustrate the methodology.