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

52 Pages Posted: 3 Nov 2008

See all articles by Robert F. Engle

Robert F. Engle

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); New York University (NYU) - Volatility and Risk Institute

Jose Gonzalo Rangel

affiliation not provided to SSRN

Multiple version iconThere are 3 versions of this paper

Date Written: December 2006

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 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 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.

Suggested Citation

Engle, Robert F. and Rangel, Jose Gonzalo, The Spline-Garch Model for Low Frequency Volatility and its Global Macroeconomic Causes (December 2006). NYU Working Paper No. FIN-07-049, Available at SSRN: https://ssrn.com/abstract=1293632

Robert F. Engle (Contact Author)

New York University (NYU) - Department of Finance ( email )

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

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

New York University (NYU) - Volatility and Risk Institute ( email )

44 West 4th Street
New York, NY 10012
United States

Jose Gonzalo Rangel

affiliation not provided to SSRN ( email )

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