Modeling Long Memory and Structural Breaks in Conditional Variances: An Adaptive FIGARCH Approach

Posted: 27 Mar 2007 Last revised: 9 Jun 2013

See all articles by Claudio Morana

Claudio Morana

Università di Milano Bicocca; Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS); Università degli Studi di Milano-Bicocca - Center for European Studies (CefES); Center for Economic Research on Pensions and Welfare Policies (CeRP); Rimini Center for Economic Analysis - Europe ETS; Rimini Center for Economic Analysis - HQ

Richard Baillie

Michigan State University - The Eli Broad College of Business and The Eli Broad Graduate School of Management

Date Written: June 1, 2007

Abstract

This paper introduces a new long memory volatility process, denoted by Adaptive FIGARCH, or A-FIGARCH, which is designed to account for both long memory and structural change in the conditional variance process. Structural change is modeled by allowing the intercept to follow a smooth deterministic process, specified by Gallant (1984)'s flexible functional form. A Monte Carlo study finds that the A-FIGARCH model outperforms the standard FIGARCH model when structural change is present, and performs at least as well in the absence of structural instability. An empirical application to stock market volatility is also included to illustrate the usefulness of the technique.

Keywords: FIGARCH, long memory, structural change, stock market volatility

JEL Classification: C15, C22, G1

Suggested Citation

Morana, Claudio and Baillie, Richard, Modeling Long Memory and Structural Breaks in Conditional Variances: An Adaptive FIGARCH Approach (June 1, 2007). Journal of Economic Dynamics and Control, 33, 2009, Available at SSRN: https://ssrn.com/abstract=974475

Claudio Morana (Contact Author)

Università di Milano Bicocca ( email )

Dip Economia Metodi Quantitativi Strategie Impresa
Piazza dell'Ateneno Nuovo 1
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Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS) ( email )

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Università degli Studi di Milano-Bicocca - Center for European Studies (CefES) ( email )

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Milano, 20126
Italy

Center for Economic Research on Pensions and Welfare Policies (CeRP) ( email )

Moncalieri, Turin
Italy

Rimini Center for Economic Analysis - Europe ETS ( email )

Piazza Ateneo Nuovo 1
Milan, 20126
Italy

Rimini Center for Economic Analysis - HQ ( email )

900 University Avenue
Riverside, CA 92521
United States

Richard Baillie

Michigan State University - The Eli Broad College of Business and The Eli Broad Graduate School of Management ( email )

East Lansing, MI 48824-1121
United States

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