The Spline-GARCH Model for Low-Frequency Volatility and its Global Macroeconomic Causes

Posted: 2 Jul 2008

See all articles by Robert F. Engle

Robert F. Engle

New York University - Leonard N. Stern School of Business - Department of Economics; New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)

Jose Gonzalo Rangel

affiliation not provided to SSRN

Multiple version iconThere are 3 versions of this paper

Date Written: May 2008

Abstract

Twenty-five years of volatility research has left the macroeconomic environment playing a minor role. This paper proposes modeling equity volatilities as a combination of macro- economic 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 of GDP, inflation, and short-term interest rates are more volatile or when inflation is high and output growth is low. Volatility is higher not only for emerging markets and markets with small numbers of listed companies and market capitalization relative to GDP, but also for large economies. The model allows long horizon forecasts of volatility to depend on macroeconomic developments, and delivers estimates of the volatility to be anticipated in a newly opened market.

JEL Classification: C14, C22, G10, G15, E44

Suggested Citation

Engle, Robert F. and Rangel, Jose Gonzalo, The Spline-GARCH Model for Low-Frequency Volatility and its Global Macroeconomic Causes (May 2008). The Review of Financial Studies, Vol. 21, Issue 3, pp. 1187-1222, 2008. Available at SSRN: https://ssrn.com/abstract=1154428 or http://dx.doi.org/hhn004

Robert F. Engle (Contact Author)

New York University - Leonard N. Stern School of Business - Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jose Gonzalo Rangel

affiliation not provided to SSRN ( email )

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