Empirical analysis of stock indices under a regime-switching model with dependent jump size risks

- We propose a regime-switching model with dependent jump sizes risks (RSMDJ).
- The RSMDJ considers both cyclical movements as well as abnormal jump attributes of the asset price.
- The RSMDJ can better capture the dynamics of stock market indices than the competing models.
- The empirical results well address the asymmetry, leptokurtosis, and volatility clustering of stock returns.
- The clustering of jump sizes also produces the feature of volatility clustering.

In this study, we propose a regime-switching model with dependent jump size risks to capture important characteristics of cyclical movements and abnormal shock events. We further demonstrate that the two-state model provides asymmetric and leptokurtic return features, and volatility clustering is observed empirically using 12 years of daily data for the S&P 500, Dow Jones Industrial Average (DJIA), and Nikkei 225 indices. In addition, our results indicate that the regime-switching model with dependent jump size risks is superior to the competing models.