Leverage Effect on Financial Series using a Bayesian TAR Model

Abstract

This research shows that under certain mathematical conditions, a threshold autoregressive model (TAR) can represent the leverage effect based on its conditional variance function. Furthermore, the analytical expressions for the third and fourth moment of the TAR model are obtained when it is weakly stationary. This research makes an empirical application, where TAR model is fitted using Nieto’s (2005) methodology and VAR-GARCH multivariate model is estimated through A-BEKK approach to the BOVESPA stock index. Finally, both statistical models are compared, via conditional and unconditional moments, and the representation of the leverage effect.