Modelling inflation dynamics

A Bayesian comparison between GARCH and stochastic volatility

Bibliographic Data

ID15067002
AuthorsHai Le (0000-0001-9351-7866, Graduate School of Economics, Kyoto University, Kyoto, Japan, corresponding author)
Year2023
Volume36
Issue1
Pages2112-2136
Publication date2023-03-31
Peer ReviewedYes
Open AccessYes
TypeARTICLE
VenueEconomic Research-Ekonomska Istraživanja (JOURNAL)
Journal identifiersISSN: 1331-677X • E-ISSN: 1848-9664
PublisherInforma UK Limited (PUBLISHER • GB)
DOI10.1080/1331677x.2022.2096093
OpenAlexW4285729742
LanguageEN
References cited31

This study employs a prominent model comparison criterion, namely the Bayes factor, to compare three commonly used GARCH models with their stochastic volatility (SV) counterparts in modelling the dynamics of inflation rates. By using consumer price index (CPI) data from 18 developed countries to evaluate these models, we find that the GARCH models are generally outperformed by their stochastic volatility counterparts. Furthermore, the stochastic volatility in mean (SV-M) model is shown to be the best for all 18 countries considered. The paper also examines which model characteristics play a main role in modelling inflation rates. It turns out that inflation volatility feedback is a crucial feature that we should take into consideration when modelling inflation rates. The relevance of a leverage effect, however, is found to be rather ambiguous. Finally, the forecasting results using the log predictive score confirm these findings

Autoregressive conditional heteroskedasticity · Bayesian probability · Econometrics · Economics · Physics · SABR volatility model · Statistics · Stochastic volatility · Financial Risk and Volatility Modeling · Market Dynamics and Volatility · Mathematics · Monetary Policy and Economic Impact

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Open DOIOpen Access