The Spline GARCH Model for Unconditional Volatility and its Global Macroeconomic Causes

Robert Engle and Jose Rangel ()
Authors registered in the RePEc Author Service: Jesus Gonzalo

Working Papers from Czech National Bank, Research and Statistics Department

Abstract: 25 years of volatility research has left the macroeconomic environment playing a minor role. This paper proposes modeling equity volatilities as a combination of macroeconomic effects and time series dynamics. High frequency return volatility is specified to be the product of a slow moving deterministic component, represented by an exponential spline, and a unit GARCH. This deterministic component is the unconditional volatility, which is then estimated for nearly 50 countries over various sample periods of daily data. Unconditional volatility is then modeled as an unbalanced panel with a variety of dependence structures. It is found to vary over time and across countries with high unconditional volatility resulting from high volatility in the macroeconomic factors GDP, inflation and short term interest rate, and with high inflation and slow growth of output. Volatility is higher for emerging markets and for markets with small numbers of listed companies and market capitalization, but also for large economies. The model allows long horizon forecasts of volatility to depend on macroeconomic developments, and delivers estimates of the volatility to be anticipated in a newly opened market.

Keywords: . Arch; garch; global volatility; spline and volatility. (search for similar items in EconPapers)
JEL-codes: C14 C19 (search for similar items in EconPapers)
Date: 2005-12
New Economics Papers: this item is included in nep-bec, nep-ecm, nep-ets, nep-for and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (38)

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