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Alternative Models For Conditional Stock Volatility

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  • PAGAN, A.R.
  • SCHWERT, G.W.

Abstract

This paper compares several statistical models for monthly stock return volatility. The focus is on U.S. data from 1834-19:5 because the post-1926 data have been analyzed in more detail by others. Also, the Great Depression had levels of stock volatility that are inconsistent with stationary models for conditional heteroskedasticity, We show the importance of nonlinearities in stock return behavior that are not captured by conventional ARCH or GARCH models. We also show the nonstationariry of stock volatility, even over the 1834-1925 period.

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Bibliographic Info

Paper provided by Rochester, Business - General in its series Papers with number 89-02.

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Length: 22 pages
Date of creation: 1989
Date of revision:
Handle: RePEc:fth:robuge:89-02

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Postal: UNIVERSITY OF ROCHESTER, CENTER FOR MANUFACTURING AND OPERATIONS MANAGEMENT, WILLIAM E. SIMON GRADUATE SCHOOL OF BUSINESS ADMINISTRATION,
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Web page: http://www.simon.rochester.edu/
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Related research

Keywords: prices ; business cycles ; homoskedasticity;

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References

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  1. G. William Schwert, 1988. "Tests For Unit Roots: A Monte Carlo Investigation," NBER Technical Working Papers 0073, National Bureau of Economic Research, Inc.
  2. Joseph G. Haubrich & Andrew W. Lo, . "The Sources and Nature of Long-Term Memory in the Business Cycle," Rodney L. White Center for Financial Research Working Papers 05-89, Wharton School Rodney L. White Center for Financial Research.
  3. Schwert, G William, 1989. " Why Does Stock Market Volatility Change over Time?," Journal of Finance, American Finance Association, vol. 44(5), pages 1115-53, December.
  4. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
  5. Ghysels, Eric & Hall, Alastair, 1990. "A Test for Structural Stability of Euler Conditions Parameters Estimated via the Generalized Method of Moments Estimator," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(2), pages 355-64, May.
  6. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, Econometric Society, vol. 57(2), pages 357-84, March.
  7. Hamilton, James D., 1988. "Rational-expectations econometric analysis of changes in regime : An investigation of the term structure of interest rates," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 385-423.
  8. Bollerslev, Tim & Engle, Robert F & Wooldridge, Jeffrey M, 1988. "A Capital Asset Pricing Model with Time-Varying Covariances," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 96(1), pages 116-31, February.
  9. French, Kenneth R. & Schwert, G. William & Stambaugh, Robert F., 1987. "Expected stock returns and volatility," Journal of Financial Economics, Elsevier, vol. 19(1), pages 3-29, September.
  10. Hoffman, D. & Pagan, A., 1988. "Post-Sample Prediction Tests For Generalized Method Of Moment Estimators," RCER Working Papers 129, University of Rochester - Center for Economic Research (RCER).
  11. Peter C.B. Phillips & Pierre Perron, 1986. "Testing for a Unit Root in Time Series Regression," Cowles Foundation Discussion Papers 795R, Cowles Foundation for Research in Economics, Yale University, revised Sep 1987.
  12. Schwert, G. William, 1989. "Business cycles, financial crises, and stock volatility," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 31(1), pages 83-125, January.
  13. Pagan, Adrian & Ullah, Aman, 1988. "The Econometric Analysis of Models with Risk Terms," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 3(2), pages 87-105, April.
  14. Peter C.B. Phillips, 1985. "Time Series Regression with a Unit Root," Cowles Foundation Discussion Papers 740R, Cowles Foundation for Research in Economics, Yale University, revised Feb 1986.
  15. Gallant, A. Ronald, 1981. "On the bias in flexible functional forms and an essentially unbiased form : The fourier flexible form," Journal of Econometrics, Elsevier, vol. 15(2), pages 211-245, February.
  16. Hansen, Bruce E., 1992. "Heteroskedastic cointegration," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 139-158.
  17. B. Mandelbrot, 1972. "Statistical Methodology For Nonperiodic Cycles: From The Covariance To Rs Analysis," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 1, number 3, pages 259-290 National Bureau of Economic Research, Inc.
  18. Christie, Andrew A., 1982. "The stochastic behavior of common stock variances : Value, leverage and interest rate effects," Journal of Financial Economics, Elsevier, vol. 10(4), pages 407-432, December.
  19. Adián R. Pagan & Hernán Sabau, 1992. "Consistency tests for heteroskedastic and risk models," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 7(1), pages 3-30.
  20. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, Econometric Society, vol. 50(4), pages 987-1007, July.
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