Modelling long memory and structural breaks in conditional variances: An adaptive FIGARCH approach

Richard T. Baillie and Claudio Morana

Journal of Economic Dynamics and Control, 2009, vol. 33, issue 8, pages 1577-1592

Abstract: This paper introduces a new long memory volatility process, denoted by adaptive FIGARCH, or A-FIGARCH , which is designed to account for both long memory and structural change in the conditional variance process. Structural change is modeled by allowing the intercept to follow the smooth flexible functional form due to Gallant (1984. The Fourier flexible form. American Journal of Agricultural Economics 66, 204-208). A Monte Carlo study finds that the A-FIGARCH model outperforms the standard FIGARCH model when structural change is present, and performs at least as well in the absence of structural instability. An empirical application to stock market volatility is also included to illustrate the usefulness of the technique.

Keywords: FIGARCH; Long; memory; Structural; change; Stock; market; volatility (search for similar items in EconPapers)
Date: 2009

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Persistent link: http://EconPapers.repec.org/RePEc:eee:dyncon:v:33:y:2009:i:8:p:1577-1592

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