Please use this identifier to cite or link to this item: http://hdl.handle.net/1822/17764

TitleModelling changes in the unconditional variance of long stock return series
Author(s)Amado, Cristina
Teräsvirta, Timo
KeywordsModel specification
Timevarying unconditional variance
Conditional heteroskedasticity
Lagrange multiplier test
Long financial time series
Volatility persistence
Issue dateFeb-2012
PublisherUniversidade do Minho. Núcleo de Investigação em Políticas Económicas (NIPE)
Abstract(s)In this paper we develop a testing and modelling procedure for describing the long-term volatility movements over very long return series. For the purpose, we assume that volatility is multiplicatively decomposed into a conditional and an unconditional component as in Amado and Ter¨asvirta (2011). The latter component is modelled by incorporating smooth changes so that the unconditional variance is allowed to evolve slowly over time. Statistical inference is used for specifying the parameterization of the time-varying component by applying a sequence of Lagrange multiplier tests. The model building procedure is illustrated with an application to daily returns of the Dow Jones Industrial Average stock index covering a period of more than ninety years. The main conclusions are as follows. First, the LM tests strongly reject the assumption of constancy of the unconditional variance. Second, the results show that the long-memory property in volatility may be explained by ignored changes in the unconditional variance of the long series. Finally, based on a formal statistical test we find evidence of the superiority of volatility forecast accuracy of the new model over the GJR-GARCH model at all horizons for a subset of the long return series.
TypeWorking paper
URIhttp://hdl.handle.net/1822/17764
Publisher versionhttp://www3.eeg.uminho.pt/economia/nipe/docs/2012/NIPE_WP_2_2012.pdf
Peer-Reviewedno
AccessOpen access
Appears in Collections:NIPE - Documentos de Trabalho

Files in This Item:
File Description SizeFormat 
NIPE_WP_2_2012.pdfNIPE WP 02/20121,74 MBAdobe PDFView/Open

Partilhe no FacebookPartilhe no TwitterPartilhe no DeliciousPartilhe no LinkedInPartilhe no DiggAdicionar ao Google BookmarksPartilhe no MySpacePartilhe no Orkut
Exporte no formato BibTex mendeley Exporte no formato Endnote Adicione ao seu ORCID