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The Spline GARCH Model for Unconditional Volatility and its Global Macroeconomic Causes

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Author Info
Robert F. Engle
Jose Gonzalo Rangel

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Abstract

25 years of volatility research has left the macroeconomic environment playing a minor role. This paper proposes modeling equity volatilities as a combination of macroeconomic effects and time series dynamics. High frequency return volatility is specified to be the product of a slow moving deterministic component, represented by an exponential spline, and a unit GARCH. This deterministic component is the unconditional volatility, which is then estimated for nearly 50 countries over various sample periods of daily data. Unconditional volatility is then modeled as an unbalanced panel with a variety of dependence structures. It is found to vary over time and across countries with high unconditional volatility resulting from high volatility in the macroeconomic factors GDP, inflation and short term interest rate, and with high inflation and slow growth of output. Volatility is higher for emerging markets and for markets with small numbers of listed companies and market capitalization, but also for large economies. The model allows long horizon forecasts of volatility to depend on macroeconomic developments, and delivers estimates of the volatility to be anticipated in a newly opened market.

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Paper provided by Czech National Bank, Research Department in its series Working Papers with number 2005/13.

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Date of creation: Dec 2005
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Handle: RePEc:cnb:wpaper:2005/13

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Related research
Keywords: . Arch; garch; global volatility; spline and volatility.;

Find related papers by JEL classification:
C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Semiparametric and Nonparametric Methods
C19 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Other

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References listed on IDEAS
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    Other versions:
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    Other versions:
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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. Francis X. Diebold & Kamil Yilmaz, 2008. "Macroeconomic Volatility and Stock Market Volatility, Worldwide," NBER Working Papers 14269, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Xiao, Zhijie & Lima, Luiz Renato Regis de Oliveira, 2006. "Testing Covariance Stationarity," Economics Working Papers (Ensaios Economicos da EPGE) 632, Graduate School of Economics, Getulio Vargas Foundation (Brazil). [Downloadable!]
    Other versions:
  3. Amado, Cristina & Teräsvirta, Timo, 2008. "Modelling Conditional and Unconditional Heteroskedasticity with Smoothly Time-Varying Structure," Working Paper Series in Economics and Finance 691, Stockholm School of Economics. [Downloadable!]
    Other versions:
  4. Genaro, SUCARRAT, 2006. "The First Stage in HendryÕs Reduction Theory Revisited," Discussion Papers (ECON - Département des Sciences Economiques) 2006041, Université catholique de Louvain, Département des Sciences Economiques. [Downloadable!]
  5. Tobias Adrian & Joshua Rosenberg, 2006. "Stock returns and volatility: pricing the short-run and long-run components of market risk," Staff Reports 254, Federal Reserve Bank of New York. [Downloadable!]
    Other versions:
  6. Francesco Audrino & Peter Bühlmann, 2007. "Splines for Financial Volatility," University of St. Gallen Department of Economics working paper series 2007 2007-11, Department of Economics, University of St. Gallen. [Downloadable!]
    Other versions:
  7. Chun Liu & John M Maheu, 2007. "Are there Structural Breaks in Realized Volatility?," Working Papers tecipa-304, University of Toronto, Department of Economics. [Downloadable!]
    Other versions:
  8. Ke-Li Xu & Peter C.B. Phillips, 2006. "Adaptive Estimation of Autoregressive Models with Time-Varying Variances," Cowles Foundation Discussion Papers 1585R, Cowles Foundation, Yale University, revised Nov 2006. [Downloadable!]
    Other versions:
  9. SUCARRAT, Genaro, 2006. "The first stage in HendryÕs reduction theory revisited," CORE Discussion Papers 2006082, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE). [Downloadable!]
  10. Richard T. Baillie & Claudio Morana, 2007. "Modeling Long Memory and Structural Breaks in Conditional Variances: an Adaptive FIGARCH Approach," ICER Working Papers - Applied Mathematics Series 11-2007, ICER - International Centre for Economic Research. [Downloadable!]
  11. Ralf Becker & Adam Clements, 2007. "Forecasting stock market volatility conditional on macroeconomic conditions," NCER Working Paper Series 18, National Centre for Econometric Research. [Downloadable!]
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