Estimation and inference for exponential smooth transition nonlinear volatility models

A family of threshold nonlinear generalised autoregressive conditionally heteroscedastic models is considered, that allows smooth transitions between regimes, capturing size asymmetry via an exponential smooth transition function. A Bayesian approach is taken and an efficient adaptive sampling scheme is employed for inference, including a novel extension to a recently proposed prior for the smoothing parameter that solves a likelihood identification problem. A simulation study illustrates that the sampling scheme performs well, with the chosen prior kept close to uninformative, while successfully ensuring identification of model parameters and accurate inference for the smoothing parameter. An empirical study confirms the potential suitability of the model, highlighting the presence of both mean and volatility (size) asymmetry; while the model is favoured over modern, popular model competitors, including those with sign asymmetry, via the deviance information criterion. (C) 2009 Elsevier B.V. All rights reserved.