Optimal Alarm Systems for FIAPARCH Processes

Abstract

In this work, an optimal alarm system is developed to predict whether a financial time series modeled via Fractionally Integrated Asymmetric Power ARCH (FIAPARCH) models, up/down crosses some particular level and give an alarm whenever this crossing is predicted. The paper presents classical and Bayesian methodology for producing optimal alarm systems. Both methodologies are illustrated and their performance compared through a simulation study. The work finishes with an empirical application to a set of data concerning daily returns of the São Paulo Stock Market.