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Volatility persistence, long memory and time-varying unconditional mean: Evidence from 10 equity indices

  • McMillan, David G.
  • Ruiz, Isabel

This paper re-examines evidence of volatility persistence and long memory in the light of potential time-variation in the unconditional mean of the volatility series. Daily equity volatility is generally regarded as exhibiting long memory, however, recent evidence has suggested that long memory may be a spurious finding arising from neglected breaks or time-variation in unconditional variance. The results presented here suggested that long memory is apparent when analysed on the assumption that unconditional variance is constant. However, both breakpoint tests and a moving average application suggest that unconditional variance exhibits substantial, although slow moving, time-variation. The apparent long-memory property largely disappears when this time-variation is taken into account. A modification of the GARCH model to allow for mean variation generates improved volatility forecasting performance, but only over long horizon. At the daily level the assumption of a constant unconditional variance does not seem to affect forecasts.

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Article provided by Elsevier in its journal The Quarterly Review of Economics and Finance.

Volume (Year): 49 (2009)
Issue (Month): 2 (May)
Pages: 578-595

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Handle: RePEc:eee:quaeco:v:49:y:2009:i:2:p:578-595
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