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Alternative Models For Conditional Stock Volatility

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  • Adrian R. Pagan
  • G. William Schwert

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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2955.

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Date of creation: Oct 1990
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Publication status: published as Journal of Econometrics, Vol. 45, pp. 267-290, (1990).
Handle: RePEc:nbr:nberwo:2955

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  1. Phillips, P C B, 1987. "Time Series Regression with a Unit Root," Econometrica, Econometric Society, Econometric Society, vol. 55(2), pages 277-301, March.
  2. French, Kenneth R. & Schwert, G. William & Stambaugh, Robert F., 1987. "Expected stock returns and volatility," Journal of Financial Economics, Elsevier, Elsevier, vol. 19(1), pages 3-29, September.
  3. Christie, Andrew A., 1982. "The stochastic behavior of common stock variances : Value, leverage and interest rate effects," Journal of Financial Economics, Elsevier, Elsevier, vol. 10(4), pages 407-432, December.
  4. Peter C.B. Phillips & Pierre Perron, 1986. "Testing for a Unit Root in Time Series Regression," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 795R, Cowles Foundation for Research in Economics, Yale University, revised Sep 1987.
  5. 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, Wharton School Rodney L. White Center for Financial Research 5-89, Wharton School Rodney L. White Center for Financial Research.
  6. G. William Schwert, 1990. "Why Does Stock Market Volatility Change Over Time?," NBER Working Papers 2798, National Bureau of Economic Research, Inc.
  7. Hoffman, Dennis L & Pagan, Adrian R, 1989. "Post-Sample Prediction Tests for Generalized Method of Moments Estimators," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 51(3), pages 333-43, August.
  8. Adián R. Pagan & Hernán Sabau, 1992. "Consistency tests for heteroskedastic and risk models," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 7(1), pages 3-30.
  9. G. William Schwert, 1990. "Business Cycles, Financial Crises, and Stock Volatility," NBER Working Papers 2957, National Bureau of Economic Research, Inc.
  10. Ghysels, E & Hall, A., 1988. "A Test For Structural Stability Of Euler Conditions Parameters Estimated Via The Generalized Methods Of Moments Estimators," Cahiers de recherche, Centre interuniversitaire de recherche en économie quantitative, CIREQ 8837, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  11. Hansen, Bruce E., 1992. "Heteroskedastic cointegration," Journal of Econometrics, Elsevier, Elsevier, vol. 54(1-3), pages 139-158.
  12. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, Elsevier, vol. 31(3), pages 307-327, April.
  13. Gallant, A. Ronald, 1981. "On the bias in flexible functional forms and an essentially unbiased form : The fourier flexible form," Journal of Econometrics, Elsevier, Elsevier, vol. 15(2), pages 211-245, February.
  14. 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.
  15. 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, Elsevier, vol. 12(2-3), pages 385-423.
  16. G. William Schwert, 1988. "Tests For Unit Roots: A Monte Carlo Investigation," NBER Technical Working Papers 0073, National Bureau of Economic Research, Inc.
  17. 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.
  18. 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.
  19. 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.
  20. 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.
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