Bayesian estimation of the Gaussian mixture GARCH model

Bayesian inference and prediction for a generalized autoregressive conditional heteroskedastic (GARCH) model where the innovations are assumed to follow a mixture of two Gaussian distributions is performed. The mixture GARCH model can capture the patterns usually exhibited by many financial time series such as volatility clustering, large kurtosis and extreme observations. A Griddy–Gibbs sampler implementation is proposed for parameter estimation and volatility prediction. Bayesian prediction of the Value at Risk is also addressed providing point estimates and predictive intervals. The method is illustrated using the Swiss Market Index.