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On the Empirical Importance of Periodicity in the Volatility of Financial Returns - Time Varying GARCH as a Second Order APC(2) Process

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  • Błażej Mazur

    ()
    (Cracow University of Economics)

  • Mateusz Pipień

    ()
    (Cracow University of Economics)

Abstract

We discuss the empirical importance of long term cyclical effects in the volatility of financial returns. Following Amado and Terasvirta (2009), Cizek and Spokoiny (2009) and others, we consider a general conditionally heteroscedastic process with stationarity property distorted by a deterministic function that governs the possible time variability of the unconditional variance. The function proposed in this paper can be interpreted as a finite Fourier approximation of an Almost Periodic (AP) function as defined by Corduneanu (1989). The resulting model has a particular form of a GARCH process with time varying parameters, intensively discussed in the recent literature. In the empirical analyses we apply a generalisation of the Bayesian AR(1)-GARCH model for daily returns of S&P500, covering the period of sixty years of US postwar economy, including the recently observed global financial crisis. The results of a formal Bayesian model comparison clearly indicate the existence of significant long term cyclical patterns in volatility with a strongly supported periodic component corresponding to a 14 year cycle. Our main results are invariant with respect to the changes of the conditional distribution from Normal to Student-t and to the changes of the volatility equation from regular GARCH to the Asymmetric GARCH.

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Bibliographic Info

Article provided by CEJEME in its journal Central European Journal of Economic Modelling and Econometrics.

Volume (Year): 4 (2012)
Issue (Month): 2 (June)
Pages: 95-116

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Handle: RePEc:psc:journl:v:4:y:2012:i:2:p:95-116

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Related research

Keywords: GARCH models; Bayesian inference; periodically correlated stochastic processes; volatility; unconditional variance;

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  1. Cristina Amado & Timo Teräsvirta, 2008. "Modelling Conditional and Unconditional Heteroskedasticity with Smoothly Time-Varying Structure," NIPE Working Papers 03/2008, NIPE - Universidade do Minho.
  2. Wolfgang Hardle & Helmut Herwartz & Vladimir Spokoiny, 2003. "Time Inhomogeneous Multiple Volatility Modeling," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 1(1), pages 55-95.
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