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Asymmetry and Long Memory in Volatility Modelling

  • Manabu Asai

    (Faculty of Economics, Soka University)

  • Michael McAleer

    (Erasmus University Rotterdam, Tinbergen Institute, The Netherlands, and Institute of Economic Research, Kyoto University)

  • Marcelo C. Medeiros

    (Department of Economics, Pontifical Catholic University of Rio de Janeiro)

A wide variety of conditional and stochastic variance models has been used to estimate latent volatility (or risk). In this paper, we propose a new long memory asymmetric volatility model which captures more flexible asymmetric patterns as compared with existing models. We extend the new specification to realized volatility by taking account of measurement errors, and use the Efficient Importance Sampling technique to estimate the model. As an empirical example, we apply the new model to the realized volatility of Standard and Poor's 500 Composite Index to show that the new specification of asymmetry significantly improves the goodness of fit, and that the out-of-sample forecasts and Value-at-Risk (VaR) thresholds are satisfactory. Overall, the results of the out-of-sample forecasts show the adequacy of the new asymmetric and long memory volatility model for the period including the global financial crisis.

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File URL: http://www.kier.kyoto-u.ac.jp/DP/DP726.pdf
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Paper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 726.

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Length: 38pages
Date of creation: Oct 2010
Date of revision:
Handle: RePEc:kyo:wpaper:726
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