Modelling volatility by variance decomposition |
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Authors: | Cristina Amado Timo Teräsvirta |
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Institution: | 1. University of Minho and NIPE, Campus de Gualtar, 4710-057 Braga, Portugal;2. CREATES, Department of Economics and Business, Aarhus University, Denmark |
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Abstract: | In this paper, we propose two parametric alternatives to the standard GJR-GARCH model of Glosten et al. (1993), based on additive and multiplicative decompositions of the variance. They allow the variance of the model to have a smooth time-varying structure. The suggested parameterizations describe structural change in the conditional and unconditional variances where the transition between regimes over time is smooth. The main focus is on the multiplicative decomposition of the variance into an unconditional and conditional components. Estimation of the multiplicative model is discussed in detail. An empirical application to daily stock returns illustrates the functioning of the model. The results show that the ‘long memory type behaviour’ of the sample autocorrelation functions of the absolute returns can also be explained by deterministic changes in the unconditional variance. |
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Keywords: | C12 C13 C22 C51 |
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