ARE VOLATILITY EXPECTATIONS CHARACTERIZED BY REGIME SHIFTS? EVIDENCE FROM IMPLIED VOLATILITY INDICES



Table 4. Regime-switching modelling for changes in implied volatility

_______________________(S&P 500 index)_______________________

Model 1

Model 2    Model 3

Model 4

Model 5

w1

-0.0793a

Model Parameters

-0.0788a     -0.0080

-0.1138a

I

-0.0146

w 2

4.3311a

4.3243a     -0.1302a

-0.0133

-0.1106a

δ

-0.0437a

-0.0358a

-0.0723a

δ2

-0.1076b

-0.0769a

-0.0479a

β

0.0965a

0.0592a     -0.6216a

-1.4887a

-0.6243a

β2

0.2078

0.1097      -1.5029a

-0.6162a

-1.5016a

Y

5.5455a

8.9329a

5.8918a

γ 2

9.21184a

5.7441a

9.5776a

φ

φ2

W1 = w 2

912.1114a

Hypothesis Tests

898.6265a    8.6952a

6.1134b

0.0184c

0.0640a

5.3364b

δ = δ2

1.9562

6.9142a

2.3351

β = β2

0.6735

0.1177    1306.9559a

1364.9120a

1298.9449a

Y1 = γ 2

19.6618a

15.0836a

18.5454a

φφ = φ2

P11 = P 22

16.6083a

13.5024a    87.9058a

79.8012a

5.2107b

84.8625a

LL

11893.48

11895.73    13453.93

13470.09

13473.32

Notes: Significance at the 1, 5 and 10 % level is denoted by a, b and c respectively.

The estimated Markov regime-switching models are represented by

v = w + βr +ζ for Model 1, v = w +δv + βr +ζ for
t i i t-1          t                                                      t i i t-1           i t -1          t

Model 2,    v = w + βr +γ r2 +ζ for Model 3,

t i i t-1        i t-1         t

v = w +δv +βr +γ r2 +ζ for Model 4, and
t i i t-1         i t -1         i t-1         t

vt = wi + δivt-1 + βirt-1 + γirt-1 + φi∆σrt-1 + ζt for Model 5. The model
parameters
w and σe are scaled by 102. The null hypothesis tests are
distributed as
χ2(1) . LL refers to the log maximum likelihood function.

24



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