Overlaying Time Scales and Persistence Estimation in GARCH(1,1) Models

Eric Hillebrand ()

Econometrics from University Library of Munich, Germany

Abstract: A common finding in the empirical literature is that financial volatility exhibits high persistence, or slow mean reversion of the order of months. We present evidence that financial volatility data contains more than a single time scale. After showing that the expectation of the sum of the estimates of the autoregressive coefficients of a GARCH(1,1) model is one when there are unknown parameter changes, we explore the phenomenon in simulations. For parameter changes within realistic ranges for stock-price volatility we obtain global estimates close to integration while the average data- generating mean reversion is of the order of a few days. Spectral analysis of the Dow Jones Industrial Average and the S&P500 index between 1985 and 2001 reveals a short time scale of the magnitude of 5- 10 days present in the data. Thus, two different time scales exist in the data, one of the order of months corresponding to different volatility regimes, and one of the order of days corresponding to the average mean reversion within regimes.

Keywords: GARCH; volatility persistence; regime switching; long memory; short memory; structural change (search for similar items in EconPapers)
JEL-codes: C22 C51 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2003-01-24
New Economics Papers: this item is included in nep-ecm and nep-ets
Note: Type of Document - Tex; prepared on IBM PC; to print on HP/PostScript; pages: 27 ; figures: included. pdf-file.
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpem:0301003

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