The Spline-Garch Model for Low Frequency Volatility and its Global Macroeconomic Causes
Robert F. Engle
New York University - Leonard N. Stern School of Business - Department of Economics; National Bureau of Economic Research (NBER); New York University (NYU) - Department of Finance
Jose Gonzalo Rangel
Goldman Sachs Group, Inc. - Global Investment Research
Review of Financial Studies, Vol. 21, 2008
25 years of volatility research has left the macroeconomic environment playing a minor role. This paper proposes modeling equity volatilities as a combination of macroeconomic effects and time series dynamics. High frequency return volatility is specified to be the product of a slow moving component, represented by an exponential spline, and a unit GARCH. This slow moving component is the low frequency volatility, which in this model coincides with the unconditional volatility. This component is estimated for nearly 50 countries over various sample periods of daily data.
Low frequency volatility is then modeled as a function of macroeconomic and financial variables in an unbalanced panel with a variety of dependence structures. It is found to vary over time and across countries. The low frequency component of volatility is greater when the macroeconomic factors GDP, inflation and short term interest rates are more volatile or when inflation is high and output growth is low. Volatility is higher for emerging markets and for markets with small numbers of listed companies and market capitalization, but also for large economies.
Number of Pages in PDF File: 51
Keywords: Spline-GARCH, Global Equity Volatility, Low-frequency Volatility, Semi-Parametric Models, Macroeconomic Determinantsworking papers series
Date posted: October 24, 2006 ; Last revised: October 6, 2010
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