Long Memory in Stock Market Volatility and the Volatility-in-Mean Effect: The FIEGARCH-M Model
CREATES Research Paper No. 2007-10
19 Pages Posted: 24 Jun 2008
Date Written: June 12, 2007
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, G12
Suggested Citation: Suggested Citation