Asymmetry of Information Flow Between Volatilities Across Time Scales
AbstractConventional time series analysis, focusing exclusively on a time series at a given scale, lacks the ability to explain the nature of the data generating process. A process equation that successfully explains daily price changes, for example, is unable to characterize the nature of hourly price changes. On the other hand, statistical properties of monthly price changes are often not fully covered by a model based on daily price changes. In this paper, we simultaneously model regimes of volatilities at multiple time scales through wavelet-domain hidden Markov models. We establish an important stylized property of volatility across different time scales. We call this property asymmetric vertical dependence. It is asymmetric in the sense that a low volatility state (regime) at a long time horizon is most likely followed by low volatility states at shorter time horizons. On the other hand, a high volatility state at long time horizons does not necessarily imply a high volatility state at shorter time horizons. Our analysis provides evidence that volatility is a mixture of high and low volatility regimes, resulting in a distribution that is non-Gaussian. This result has important implications regarding the scaling behavior of volatility, and consequently, the calculation of risk at different time scales.
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Bibliographic InfoPaper provided by Econometric Society in its series Econometric Society 2004 North American Winter Meetings with number 90.
Date of creation: 11 Aug 2004
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Volatility; High Frequency Finance; Wavelets; Hidden Markov Trees;
Other versions of this item:
- Ramazan Gencay & Nikola Gradojevic & Faruk Selcuk & Brandon Whitcher, 2010. "Asymmetry of information flow between volatilities across time scales," Quantitative Finance, Taylor and Francis Journals, vol. 10(8), pages 895-915.
- Ramazan Gencay & Nikola Gradojevic & Faruk Selcuk & Brandon Whitcher, 2009. "Asymmetry of Information Flow Between Volatilities Across Time Scales," Working Paper Series 27_09, The Rimini Centre for Economic Analysis, revised Jan 2009.
- C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
- G0 - Financial Economics - - General
- G1 - Financial Economics - - General Financial Markets
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- Benhmad, François, 2012. "Modeling nonlinear Granger causality between the oil price and U.S. dollar: A wavelet based approach," Economic Modelling, Elsevier, vol. 29(4), pages 1505-1514.
- Jozef Barunik & Lukas Vacha, 2012. "Modeling and forecasting exchange rate volatility in time-frequency domain," Papers 1204.1452, arXiv.org, revised Aug 2013.
- Jozef Barunik & Lukas Vacha, 2012. "Realized wavelet-based estimation of integrated variance and jumps in the presence of noise," Papers 1202.1854, arXiv.org, revised Feb 2013.
- Kaijian He & Kin Keung Lai & Guocheng Xiang, 2012. "Portfolio Value at Risk Estimate for Crude Oil Markets: A Multivariate Wavelet Denoising Approach," Energies, MDPI, Open Access Journal, vol. 5(4), pages 1018-1043, April.
- François Benhmad, 2011. "A wavelet analysis of oil price volatility dynamic," Economics Bulletin, AccessEcon, vol. 31(1), pages 792-806.
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