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The IGARCH e®ect: Consequences on volatility forecasting and option trading

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Author Info
Stefano HERZEL
Catalin STARICA
Thomas NORD

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Abstract

This paper studies the integrated Garch (IGARCH) e®ect, a phenomenon often encountered when estimating conditional auto-regressive models on ¯nancial time series. The analysis of twelve indexes of major ¯nancial markets provides empirical evidence of its well-spread presence especially in periods of market turbulence. We examine its impact on volatility forecasting and on trading and hedging options. We show that a strong IGARCH e®ect may have relevant consequences on trading and on risk management.

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Publisher Info
Paper provided by Università di Perugia, Dipartimento Economia, Finanza e Statistica in its series Quaderni del Dipartimento di Economia, Finanza e Statistica with number 34/2007.

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Length: 19 pages
Date of creation: 15 Jul 2007
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Handle: RePEc:pia:wpaper:34/2007

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Related research
Keywords: stock returns; volatility forecasting; GARCH(1; 1); IGARCH effect; option hedging;

Find related papers by JEL classification:
C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Semiparametric and Nonparametric Methods
C16 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Econometric and Statistical Methods; Specific Distributions
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions

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