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Stochastic Volatility Driven by Large Shocks

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  • George Kapetanios

    ()
    (Queen Mary, University of London)

  • Elias Tzavalis

    (Queen Mary, University of London)

Abstract

This paper presents a new model of stochastic volatility which allows for infrequent shifts in the mean of volatility, known as structural breaks. These are endogenously driven from large innovations in stock returns arriving in the market. The model has a number of interesting properties. Among them, it can allow for shifts in volatility which are of stochastic timing and magnitude. This model can be used to distinguish permanent shifts in volatility coming from large pieces of news arriving in the market, from ordinary volatility shocks.

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Bibliographic Info

Paper provided by Queen Mary, University of London, School of Economics and Finance in its series Working Papers with number 568.

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Date of creation: Sep 2006
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Handle: RePEc:qmw:qmwecw:wp568

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Keywords: Stochastic volatility; Structural breaks;

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References

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  1. Kapetanios, George, 2000. "Small sample properties of the conditional least squares estimator in SETAR models," Economics Letters, Elsevier, vol. 69(3), pages 267-276, December.
  2. Manabu Asai & Michael McAleer, 2005. "Dynamic Asymmetric Leverage in Stochastic Volatility Models," Econometric Reviews, Taylor & Francis Journals, vol. 24(3), pages 317-332.
  3. Durbin, James & Koopman, Siem Jan, 2001. "Time Series Analysis by State Space Methods," OUP Catalogue, Oxford University Press, number 9780198523543.
  4. Ling, Shiqing & McAleer, Michael, 2002. "Stationarity and the existence of moments of a family of GARCH processes," Journal of Econometrics, Elsevier, vol. 106(1), pages 109-117, January.
  5. Morana, Claudio & Beltratti, Andrea, 2004. "Structural change and long-range dependence in volatility of exchange rates: either, neither or both?," Journal of Empirical Finance, Elsevier, vol. 11(5), pages 629-658, December.
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Cited by:
  1. Kapetanios, George, 2009. "Testing for strict stationarity in financial variables," Journal of Banking & Finance, Elsevier, vol. 33(12), pages 2346-2362, December.
  2. Kapetanios, G. & Tzavalis, E., 2010. "Modeling structural breaks in economic relationships using large shocks," Journal of Economic Dynamics and Control, Elsevier, vol. 34(3), pages 417-436, March.

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