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A study on volatility spurious almost integration effect: A threshold realized GARCH approach

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  • Dinghai Xu

Abstract

This paper investigates the “spurious almost integration” effect of volatility under a threshold GARCH structure with realized volatility measures. To closely examine the effect, the realized persistence of volatility is proposed to be used as a threshold trigger for volatility regimes. Under the threshold framework, general closed‐form solutions of moment conditions are derived, which provide a convenient way to theoretically examine the “spurious almost integration” effect and its associated impacts. We find that introducing the volatility persistence‐driven threshold can capture regime‐specific characteristics well. It performs better than the traditional GARCH‐type models in terms of both in‐sample fitting and out‐of‐sample forecasting. Based on our Monte Carlo and empirical results, in general we find that overlooking the relatively low‐persistence regime(s) could lead to some misleading conclusions.

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  • Dinghai Xu, 2021. "A study on volatility spurious almost integration effect: A threshold realized GARCH approach," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(3), pages 4104-4126, July.
    • Handle: RePEc:wly:ijfiec:v:26:y:2021:i:3:p:4104-4126
    DOI: 10.1002/ijfe.2006
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    Cited by:

    1. Xu, Dinghai, 2022. "Canadian stock market volatility under COVID-19," International Review of Economics & Finance, Elsevier, vol. 77(C), pages 159-169.

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    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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