Cross-Sectional Aggregation and Persistence in Conditional Variance
AbstractThis paper explores the interactions between cross-sectional aggregation and persistence of volatility shocks. We derive the ARMA-GARCH representation that linear aggregates of ARMA processes with GARCH errors admit, and establish conditions under which persistence in volatility of the aggregate series is higher than persistence in the volatility of the individual series. The practical implications of the results are illustrated empirically in the context of an option pricing exercise.
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Bibliographic InfoPaper provided by Department of Economics, University of York in its series Discussion Papers with number 00/09.
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Postal: Department of Economics and Related Studies, University of York, York, YO10 5DD, United Kingdom
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ARMA process; Cross-sectional aggregation; GARCH process; Volatility persistence.;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2000-03-13 (All new papers)
- NEP-ECM-2000-03-13 (Econometrics)
- NEP-ETS-2000-03-13 (Econometric Time Series)
- NEP-FIN-2000-03-13 (Finance)
- NEP-FMK-2000-03-13 (Financial Markets)
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