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.