Long Memory in Stock Market Volatility and the Volatility-in-Mean Effect: The FIEGARCH-M Model
19 Pages Posted: 22 Jun 2008
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Long Memory in Stock Market Volatility and the Volatility-in-Mean Effect: The FIEGARCH-M Model
Long Memory in Stock Market Volatility and the Volatility-in-Mean Effect: The FIEGARCH-M Model
Date Written: June 12, 2007
Abstract
We extend the fractionally integrated exponential GARCH (FIEGARCH) model for daily stock return data with long memory in return volatility of Bollerslev and Mikkelsen (1996) by introducing a possible volatility-in-mean effect. To avoid that the long memory property of volatility carries over to returns, we consider a filtered FIEGARCH-in-mean (FIEGARCH-M) effect in the return equation. The filtering of the volatility-in-mean component thus allows the co-existence of long memory in volatility and short memory in returns. We present an application to the S&P 500 index which documents the empirical relevance of our model.
Keywords: FIEGARCH, financial leverage, GARCH, long memory, risk-return tradeoff, stock returns, volatility feedback
JEL Classification: C22
Suggested Citation: Suggested Citation