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The Effect of Long Memory in Volatility on Stock Market Fluctuations

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Author Info
Bent Jesper Christensen
Morten Ørregaard Nielsen () (School of Economics and Management, University of Aarhus, Denmark)

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Abstract

Recent empirical evidence demonstrates the presence of an important long memory component in realized asset return volatility. We specify and estimate multivariate models for the joint dynamics of stock returns and volatility that allow for long memory in volatility without imposing this property on returns. Asset pricing theory imposes testable cross- equation restrictions on the system that are not rejected in our preferred specifications, which include a strong financial leverage effect. We show that the impact of volatility shocks on stock prices is small and short-lived, in spite of a positive risk-return trade-off and long memory in volatility.

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Paper provided by School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2007-03.

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Length: 44
Date of creation: 11 May 2007
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Handle: RePEc:aah:create:2007-03

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Related research
Keywords: Financial leverage; long memory; realized volatility; risk-return trade-off; stochastic volatility; stock prices; VARMA models; VIX implied volatility.;

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Find related papers by JEL classification:
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Bent Jesper Christensen & Christian M. Dahl & Emma M. Iglesias, 2008. "Semiparametric Inference in a GARCH-in-Mean Model," CREATES Research Papers 2008-46, School of Economics and Management, University of Aarhus. [Downloadable!]
  2. Bent Jesper Christensen & Morten Ørregaard Nielsen & Jie Zhu, 2007. "Long Memory in Stock Market Volatility and the Volatility-in-Mean Effect: The FIEGARCH-M Model," CREATES Research Papers 2007-10, School of Economics and Management, University of Aarhus. [Downloadable!]
    Other versions:
  3. Jie Zhu, 2008. "FIEGARCH-M and and International Crises: A Cross-Country Analysis," CREATES Research Papers 2008-16, School of Economics and Management, University of Aarhus. [Downloadable!]
  4. Christian Conrad & Menelaos Karanasos & Ning Zeng, 2008. "Multivariate Fractionally Integrated APARCH Modeling of Stock Market Volatility: A multi-country study," Working Papers 0472, University of Heidelberg, Department of Economics, revised Jul 2008. [Downloadable!]
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