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

See all articles by Bent Jesper Christensen

Bent Jesper Christensen

Aarhus University; Aarhus University; Aarhus University

Morten Ørregaard Nielsen

Queen's University - Department of Economics

Jie Zhu

University of Aarhus - School of Economics and Management; Aarhus University - CREATES

Multiple version iconThere are 2 versions of this paper

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, G12

Suggested Citation

Christensen, Bent Jesper and Nielsen, Morten Orregaard and Zhu, Jie, Long Memory in Stock Market Volatility and the Volatility-in-Mean Effect: The FIEGARCH-M Model (June 12, 2007). CREATES Research Paper No. 2007-10. Available at SSRN: https://ssrn.com/abstract=1150049 or http://dx.doi.org/10.2139/ssrn.1150049

Bent Jesper Christensen

Aarhus University ( email )

Fuglesangs Alle 4
DK-8210 Aarhus V, 8210
Denmark

Aarhus University ( email )

Fuglesangs Alle 4
DK-8210 Aarhus V, 8210
Denmark

Aarhus University ( email )

Fuglesangs Alle 4
DK-8210 Aarhus V, 8210
Denmark

Morten Orregaard Nielsen (Contact Author)

Queen's University - Department of Economics ( email )

94 University Avenue
Kingston K7L 3N6, Ontario
Canada

HOME PAGE: http://www.econ.queensu.ca/faculty/nielsen/

Jie Zhu

University of Aarhus - School of Economics and Management ( email )

Building 1323, Room 226
Aarhus, 8000
Denmark
+45-89422138 (Phone)

Aarhus University - CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

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