Cross-Sectional Aggregation and Persistence in Conditional Variance
Menelaos Karanasos (),
Zacharias Psaradakis () and
Martin Sola ()
Discussion Papers from Department of Economics, University of York
This paper explores the interactions between cross-sectional aggregation and persistence of volatility shocks. We derive the ARMA-GARCH representation that linear aggregates of ARMA processes with GARCH errors admit, and establish conditions under which persistence in volatility of the aggregate series is higher than persistence in the volatility of the individual series. The practical implications of the results are illustrated empirically in the context of an option pricing exercise.
Keywords: ARMA process; Cross-sectional aggregation; GARCH process; Volatility persistence. (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:yor:yorken:00/09
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