The IGARCH e®ect: Consequences on volatility forecasting and option trading

Stefano Herzel, Catalin Starica and Thomas Nord

No 34/2007, Quaderni del Dipartimento di Economia, Finanza e Statistica from Università di Perugia, Dipartimento Economia

Abstract: This paper studies the integrated Garch (IGARCH) e®ect, a phenomenon often encountered when estimating conditional auto-regressive models on ¯nancial time series. The analysis of twelve indexes of major ¯nancial markets provides empirical evidence of its well-spread presence especially in periods of market turbulence. We examine its impact on volatility forecasting and on trading and hedging options. We show that a strong IGARCH e®ect may have relevant consequences on trading and on risk management.

Keywords: stock returns; volatility forecasting; GARCH(1; 1); IGARCH effect; option hedging (search for similar items in EconPapers)
JEL-codes: C14 C16 C32 (search for similar items in EconPapers)
Pages: 19 pages
Date: 2007-07-15
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Citations: View citations in EconPapers (6)

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