The Effect of Long Memory in Volatility on Stock Market Fluctuations
Bent Jesper Christensen () and
Morten Nielsen ()
CREATES Research Papers from Department of Economics and Business Economics, Aarhus University
Recent empirical evidence demonstrates the presence of an important long memory component in realized asset return volatility. We specify and estimate multivariate models for the joint dynamics of stock returns and volatility that allow for long memory in volatility without imposing this property on returns. Asset pricing theory imposes testable cross- equation restrictions on the system that are not rejected in our preferred specifications, which include a strong financial leverage effect. We show that the impact of volatility shocks on stock prices is small and short-lived, in spite of a positive risk-return trade-off and long memory in volatility.
Keywords: Financial leverage; long memory; realized volatility; risk-return trade-off; stochastic volatility; stock prices; VARMA models; VIX implied volatility. (search for similar items in EconPapers)
JEL-codes: C32 G12 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (33) Track citations by RSS feed
Downloads: (external link)
Journal Article: The Effect of Long Memory in Volatility on Stock Market Fluctuations (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:aah:create:2007-03
Access Statistics for this paper
More papers in CREATES Research Papers from Department of Economics and Business Economics, Aarhus University
Bibliographic data for series maintained by ().