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A Study on Volatility Spurious Almost Integration Effect: A Threshold Realized GARCH Approach

Dinghai Xu

No 1903, Working Papers from University of Waterloo, Department of Economics

Abstract: This paper investigates the “spurious almost integration” effect of volatility under a threshold GARCH structure with realized volatility measures. To closely examine the effect, the realized persistence of volatility is proposed to be used as a threshold trigger for volatility regimes. Under the threshold framework, general closed-form solutions of moment conditions are derived, which provide a convenient way to theoretically examine the “spurious almost integration” effect and its associated impacts. We find that introducing the volatility persistence-driven threshold can capture regime-specific characteristics well. It performs better than the traditional GARCH-type models in terms of both in-sample fitting and out-of-sample forecasting. Based on our Monte Carlo and empirical results, in general we find that overlooking the relatively low persistence regime(s) could lead to some misleading conclusions.

JEL-codes: C01 C58 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2019-12, Revised 2019-12
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-for and nep-ore
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