How Persistent is Stock Return Volatility? An Answer with Markov Regime Switching Stochastic Volatility Models

23 Pages Posted: 11 Jul 2007

See all articles by Soosung Hwang

Soosung Hwang

Sungkyunkwan University - Department of Economics

Stephen E. Satchell

University of Cambridge - Faculty of Economics and Politics

Pedro L. Valls Pereira

Sao Paulo School of Economics - FGV and CEQEF- FGV

Abstract

We propose generalised stochastic volatility models with Markov regime changing state equations (SVMRS) to investigate the important properties of volatility in stock returns, specifically high persistence and smoothness. The model suggests that volatility is far less persistent and smooth than the conventional GARCH or stochastic volatility. Persistent short regimes are more likely to occur when volatility is low, while far less persistence is likely to be observed in high volatility regimes. Comparison with different classes of volatility supports the SVMRS as an appropriate proxy volatility measure. Our results indicate that volatility could be far more difficult to estimate and forecast than is generally believed.

JEL Classification: G12

Suggested Citation

Hwang, Soosung and Satchell, Stephen E. and Valls Pereira, Pedro L., How Persistent is Stock Return Volatility? An Answer with Markov Regime Switching Stochastic Volatility Models. Journal of Business Finance & Accounting, Vol. 34, No. 5-6, pp. 1002-1024, June/July 2007. Available at SSRN: https://ssrn.com/abstract=999775 or http://dx.doi.org/10.1111/j.1468-5957.2007.02025.x

Soosung Hwang (Contact Author)

Sungkyunkwan University - Department of Economics ( email )

25-2 Sungkyunkwan-ro
Jongno-Gu
110-745 Seoul
+82 (0)2 760 0489 (Phone)
+82 (0)2 744 5717 (Fax)

Stephen E. Satchell

University of Cambridge - Faculty of Economics and Politics ( email )

Austin Robinson Building
Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom
44 (0)1223 335213 (Phone)
44 (0)1223 335475 (Fax)

HOME PAGE: http://www.econ.cam.ac.uk/faculty/satchell/index.h

Pedro L. Valls Pereira

Sao Paulo School of Economics - FGV and CEQEF- FGV ( email )

Rua Itapeva 474 room 1006
São Paulo, São Paulo 01332-000
Brazil
55+11+37993726 (Phone)
55+11+37993357 (Fax)

HOME PAGE: http://sites.google.com/site/pedrovallspereira

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