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Modeling and forecasting firm-specific volatility: The role of asymmetry and long-memory

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  • González-Pla, Francisco
  • Lovreta, Lidija

Abstract

We analyze the relevance of asymmetry and long-memory in modeling and forecasting firm-specific volatility. The asymmetric effect and the degree of long-memory seem to be more pronounced for equity than for firm's asset volatility. However, once the asymmetry is allowed in the model along with long-memory, firm's asset volatility is more persistent than equity volatility for high leverage firms. A horse race among different GARCH-type models (GARCH, EGARCH, IGARCH, FIGARCH, HYGARCH, FIEGARCH, and FIAPARCH) shows that more sophisticated (FIEGARCH and FIAPARCH) models outperform other specifications in out-of-sample firm-level volatility forecasting. The simplest GARCH and IGARCH models show the worst performance.

Suggested Citation

  • González-Pla, Francisco & Lovreta, Lidija, 2022. "Modeling and forecasting firm-specific volatility: The role of asymmetry and long-memory," Finance Research Letters, Elsevier, vol. 48(C).
    • Handle: RePEc:eee:finlet:v:48:y:2022:i:c:s1544612322001933
    DOI: 10.1016/j.frl.2022.102931
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    More about this item

    Keywords

    Firm-level volatility; Forecasting; GARCH models; Long-memory; Asymmetry;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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