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Shrinkage Estimation For Multivariate Hidden Markov Mixture Models, Mark Fiecas, Jürgen Franke, Rainer Von Sachs, Joseph Tadjuidje
Shrinkage Estimation For Multivariate Hidden Markov Mixture Models, Mark Fiecas, Jürgen Franke, Rainer Von Sachs, Joseph Tadjuidje
Mark Fiecas
Motivated from a changing market environment over time, we consider high-dimensional data such as financial returns, generated by a hidden Markov model which allows for switching between different regimes or states. To get more stable estimates of the covariance matrices of the different states, potentially driven by a number of observations which is small compared to the dimension, we apply shrinkage and combine it with an EM-type algorithm. This approach will yield better estimates a more stable estimates of the covariance matrix, which allows for improved reconstruction of the hidden Markov chain. In addition to a simulation study and the …