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Measuring volatility persistence in the presence of sudden changes in the variance of Canadian stock returns

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  • Farooq Malik
  • Bradley T. Ewing
  • James E. Payne

Abstract

. It is well known that volatility persistence is overestimated if regime shifts are not accounted for in the standard GARCH model. This research detects time periods of sudden changes in variance using the iterated cumulated sums of squares (ICSS) algorithm. Using weekly data for the Canadian stock market indicates that after accounting for endogenously determined volatility shifts in the GARCH model, the estimated persistence in volatility is significantly reduced. This casts some doubt on previous findings that volatility in financial markets is highly persistent. The findings have important implications for investors and financial market participants. JEL classification: G1 Mesure de la persistance de la volatilité quand des changements soudains se produisent dans la variance des rendements sur les actions en bourse dans les marchés financiers canadiens. Il est bien connu que la persistance de la volatilité est surestimée si on ne tient pas compte des changements de régimes dans le modèle GARCH standard. Ce mémoire identifie les périodes de changements soudains à l’aide de l’algorithme de l’itération des sommes de carrés cumulatifs. A l’aide de données hebdomadaires pour les marchés financiers canadiens, on montre que la prise en compte des changements de régimes de volatilité déterminés de façon endogène dans le modèle de GARCH réduit de façon significative la persistance estimée de la volatilité. Cela remet en question certains résultats antérieurs suggérant que la volatilité dans les marchés financiers est fortement persistante. Ces résultats ont des implications importantes pour les investisseurs et ceux qui sont actifs dans les marchés financiers.

Suggested Citation

  • Farooq Malik & Bradley T. Ewing & James E. Payne, 2005. "Measuring volatility persistence in the presence of sudden changes in the variance of Canadian stock returns," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 38(3), pages 1037-1056, August.
    • Handle: RePEc:wly:canjec:v:38:y:2005:i:3:p:1037-1056
    DOI: 10.1111/j.0008-4085.2005.00315.x
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    JEL classification:

    • G1 - Financial Economics - - General Financial Markets

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