Volatility Swings in the US Financial Markets
Empirical evidence shows that the dynamics of high frequency–based measures of volatility exhibit persistence and occasional abrupt changes in the average level. By looking at volatility measures for major indices, we notice similar patterns (including jumps at about the same time), with stronger similarities, the higher the degree of company capitalization represented in the indices. We adopt the recent Markov Switching Asymmetric Multiplicative Error Model to model the dynamics of the conditional expectation of realized volatility. This allows us to address the issues of a slow moving average level of volatility and of different dynamics across regimes. An extension sees a more flexible model combining the characteristics of Markov Switching and smooth transition dynamics.
|Date of creation:||Jul 2012|
|Date of revision:||Jul 2012|
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