An Application of a Short Memory Model With Random Level Shifts to the Volatility of Latin American Stock Market Returns

Gabriel Rodríguez and Roxana Tramontana
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Roxana Tramontana: Departamento de Economía - Pontificia Universidad Católica del Perú

No 2014-385, Documentos de Trabajo / Working Papers from Departamento de Economía - Pontificia Universidad Católica del Perú

Abstract: Empirical research indicates that the volatility of stock return time series have long memory. However, it has been demonstrated that short memory processes contaminated with random level shifts can often be confused as being long memory. Often this feature is referred to as spurious long memory. This paper represents an empirical study of the random level shift (RLS) model using the approach of Lu and Perron (2010) and Li and Perron (2013) for the volatility of daily stocks returns data for Öve Latin American countries. The RLS model consists of the sum of a short term memory component and a level shift component, where the level shift component is governed by a Bernoulli process with a shift probability . The estimation results suggest that the level shifts in the volatility of daily stocks returns data are infrequent but once they are taken into account, the long memory characteristic and the GARCH e§ects disappear. An out-of-sample forecasting exercise is also provided. JEL Classification-JEL: C22

Keywords: Returns; Volatility; Long Memory; Random Level Shifts; Kalman Filter; Forecasting; Latin America (search for similar items in EconPapers)
Pages: 26 pages
Date: 2014
New Economics Papers: this item is included in nep-fmk, nep-for and nep-lam
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Application of a Short Memory Model With Random Level Shifts to the Volatility of Latin American Stock Market Returns (2015)
Working Paper: An Application of a Short Memory Model with Random Level Shifts to the Volatility of Latin American Stock Market Returns (2015)
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