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Asymmetric effects and long memory in the volatility of Dow Jones stocks

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Author Info
Marcel Scharth (Department of Economics - PUC-Rio)
Marcelo Cunha Medeiros () (Department of Economics PUC-Rio)

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Abstract

Does volatility reflect a continuous reaction to past shocks or changes in the markets induce shifts in the volatility dynamics? In this paper, we provide empirical evidence that cumulated price variations convey meaningful information about multiple regimes in the realized volatility of stocks, where large falls (rises) in prices are linked to persistent regimes of high (low) variance in stock returns. Incorporating past cumulated daily returns as a explanatory variable in a flexible and systematic nonlinear framework, we estimate that falls of different magnitudes over less than two months are associated with volatility levels 20% and 60% higher than the average of periods with stable or rising prices. We show that this effect accounts for large empirical values of long memory parameter estimates. Finally, we analyze that the proposed model significantly improves out of sample performance in relation to standard methods. This result is more pronounced in periods of high volatility.

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Paper provided by Department of Economics PUC-Rio (Brazil) in its series Textos para discussão with number 532.

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Length: 36p
Date of creation: Nov 2006
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Handle: RePEc:rio:texdis:532

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Related research
Keywords: Realized volatility; long memory; nonlinear models; asymmetric effects; regime switching; regression trees; smooth transition; value-at-risk; forecasting; empirical finance.;

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  6. Michael McAleer & Marcelo Cunha Medeiros, 2006. "Realized volatility: a review," Textos para discussão 531 Publication status: F, Department of Economics PUC-Rio (Brazil). [Downloadable!]
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  7. Blume, Marshall E & Goldstein, Michael A, 1997. " Quotes, Order Flow, and Price Discovery," Journal of Finance, American Finance Association, vol. 52(1), pages 221-44, March. [Downloadable!] (restricted)
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  14. Marcelo C. Medeiros & Alvaro Veiga, 2003. "Diagnostic Checking in a Flexible Nonlinear Time Series Model," Journal of Time Series Analysis, Blackwell Publishing, vol. 24(4), pages 461-482, 07. [Downloadable!] (restricted)
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  15. Thomakos, Dimitrios D. & Wang, Tao, 2003. "Realized volatility in the futures markets," Journal of Empirical Finance, Elsevier, vol. 10(3), pages 321-353, May. [Downloadable!] (restricted)
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  19. Martin Martens & Dick van Dijk & Michiel de Pooter, 2004. "Modeling and Forecasting S&P 500 Volatility: Long Memory, Structural Breaks and Nonlinearity," Tinbergen Institute Discussion Papers 04-067/4, Tinbergen Institute. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Michael McAleer & Marcelo Cunha Medeiros, 2006. "Realized volatility: a review," Textos para discussão 531 Publication status: F, Department of Economics PUC-Rio (Brazil). [Downloadable!]
    Other versions:
  2. Marcelo Fernandes & Marcelo Cunha Medeiros & MArcelo Scharth, 2007. "Modeling and predicting the CBOE market volatility index," Textos para discussão 548, Department of Economics PUC-Rio (Brazil). [Downloadable!]
  3. Les Oxley & Chris Price & William Rea & Marco Reale, 2008. "A New Procedure to Test for H Self-Similarity," Working Papers in Economics 08/16, University of Canterbury, Department of Economics. [Downloadable!]
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