In this paper a new GARCH–M type model, denoted the GARCH-AR, is proposed. In particular, it is shown that it is possible to generate a volatility-return trade-off in a regression model simply by introducing dynamics in the standardized disturbance process. Importantly, the volatility in the...

The present paper offers a careful description of empirical identification of possible multiple changes in regime. We apply recently developed tools designed to select between regime-switching models among a broad class of linear and nonlinear regression models and provide a discussion of the...

A new approach recently suggested by Hamilton for flexible parametric inference in nonlinear models is examined through simulation studies. Hamilton suggests a new test for neglected nonlinearity and we compare it with the neural network test, Tsay's test, White's dynamic misspecification test,...