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Measuring volatility persistence in the presence of sudden changes in the variance of Canadian stock returns

Farooq Malik, Bradley Ewing () and James Payne ()

Canadian Journal of Economics, 2005, vol. 38, issue 3, 1037-1056

Abstract: It is well known that volatility persistence is overestimated if regime shifts are not accounted for in the standard GARCH model. This research detects time periods of sudden changes in variance using the iterated cumulated sums of squares (ICSS) algorithm. Using weekly data for the Canadian stock market indicates that after accounting for endogenously determined volatility shifts in the GARCH model, the estimated persistence in volatility is significantly reduced. This casts some doubt on previous findings that volatility in financial markets is highly persistent. The findings have important implications for investors and financial market participants.

JEL-codes: G1 (search for similar items in EconPapers)
Date: 2005
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Handle: RePEc:cje:issued:v:38:y:2005:i:3:p:1037-1056