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Mutual information and persistence in the stochastic volatility of market returns: An emergent market example

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  • Dima, Bogdan
  • Dima, Ştefana Maria

Abstract

This paper studies the volatility in financial market returns. We obtain strong evidences in favor of a stochastic volatility model, including an MA(1) term in errors. Also, we estimate companion models build up in the framework of FIGARCH/HYGARCH class of models. Various methods for persistence checks are used. The results suggest that mutual information might be a valid alternative for persistence checking: significant deviations of mutual information from zero can be viewed as an evidence of long-run memory. We illustrate the case of Bucharest Stock Exchange's BET index, which displays a significant persistence in returns.

Suggested Citation

  • Dima, Bogdan & Dima, Ştefana Maria, 2017. "Mutual information and persistence in the stochastic volatility of market returns: An emergent market example," International Review of Economics & Finance, Elsevier, vol. 51(C), pages 36-59.
  • Handle: RePEc:eee:reveco:v:51:y:2017:i:c:p:36-59
    DOI: 10.1016/j.iref.2017.05.008
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    More about this item

    Keywords

    Long-run memory; Stochastic volatility; Mutual information; Financial markets efficiency;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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