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

Review of Financial Studies, Vol. 21, 2008

51 Pages Posted: 24 Oct 2006 Last revised: 6 Oct 2010

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

Goldman Sachs Group, Inc. - Global Investment Research

Multiple version iconThere are 3 versions of this paper

Date Written: 2004

Abstract

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.

Keywords: Spline-GARCH, Global Equity Volatility, Low-frequency Volatility, Semi-Parametric Models, Macroeconomic Determinants

Suggested Citation

Engle, Robert F. and Rangel, Jose Gonzalo, The Spline-Garch Model for Low Frequency Volatility and its Global Macroeconomic Causes (2004). Review of Financial Studies, Vol. 21, 2008. Available at SSRN: https://ssrn.com/abstract=939447 or http://dx.doi.org/10.2139/ssrn.939447

Robert F. Engle

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 (Contact Author)

Goldman Sachs Group, Inc. - Global Investment Research ( email )

200 West Street
New York, NY 10280
United States

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