Modeling Long Memory and Structural Breaks in Conditional Variances: an Adaptive FIGARCH Approach
AbstractThis paper introduces a new long memory volatility process, denoted by Adaptive FIGARCH, or A-FIGARCH, which is designed to account for both long memory and structural change in the conditional variance process. Structural change is modeled by allowing the intercept to follow a slowly varying function, speci?ed by Gallant (1984)'s flexible functional form. A Monte Carlo study ?nds that the A-FIGARCH model outperforms the standard FIGARCH model when structural change is present, and performs at least as well in the absence of structural instability. An empirical application to stock market volatility is also included to illustrate the usefulness of the technique.
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Bibliographic InfoPaper provided by ICER - International Centre for Economic Research in its series ICER Working Papers - Applied Mathematics Series with number 11-2007.
Length: 26 pages
Date of creation: Mar 2007
Date of revision:
FIGARCH; long memory; structural change; stock market volatility.;
Other versions of this item:
- Baillie, Richard T. & Morana, Claudio, 2009. "Modelling long memory and structural breaks in conditional variances: An adaptive FIGARCH approach," Journal of Economic Dynamics and Control, Elsevier, vol. 33(8), pages 1577-1592, August.
- Richard T. Baillie & Claudio Morana, 2007. "Modeling Long Memory and Structural Breaks in Conditional Variances: An Adaptive FIGARCH Approach," Working Papers 593, Queen Mary, University of London, School of Economics and Finance.
- C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- G1 - Financial Economics - - General Financial Markets
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