# 14-118/III (2014-09-02; 2016-03-31)

Author(s)
István Barra, VU University Amsterdam, Duisenberg School of Finance, the Netherlands; Lennart Hoogerheide, VU University Amsterdam; Siem Jan Koopman, VU University Amsterdam; André Lucas, VU University Amsterdam, the Netherlands
Keywords:
Bayesian inference, importance sampling, Monte Carlo estimation, Metropolis-Hastings algorithm, mixture of Student's t-distributions
JEL codes:
C11, C15, C22, C32, C58

We propose a new methodology for designing flexible proposal densities for the joint posterior density of parameters and states in a nonlinear non-Gaussian state space model. We show that a highly efficient Bayesian procedure emerges when these proposal densities are used in an independent Metropolis-Hastings algorithm. A particular feature of our approach is that smoothed estimates of the states and the marginal likelihood are obtained directly as an output of the algorithm. Our method provides a computationally efficient alternative to several recently proposed algorithms. We present extensive simulation evidence for stochastic volatility and stochastic intensity models. For our empirical study, we analyse the performance of our method for stock returns and corporate default panel data.

(This paper is an updated version of the paper that appeared earlier as Barra, I., Hoogerheide, L.F., Koopman, S.J., and Lucas, A. (2013) "Joint Independent Metropolis-Hastings Methods for Nonlinear Non-Gaussian State Space Models". TI Discussion Paper 13-050/III. Amsterdam: Tinbergen Institute.)