The IGARCH e®ect: Consequences on volatility forecasting and option trading
This paper studies the integrated Garch (IGARCH) e®ect, a phenomenon often encountered when estimating conditional auto-regressive models on ¯nancial time series. The analysis of twelve indexes of major ¯nancial markets provides empirical evidence of its well-spread presence especially in periods of market turbulence. We examine its impact on volatility forecasting and on trading and hedging options. We show that a strong IGARCH e®ect may have relevant consequences on trading and on risk management.
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