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Structural Change and Spurious Persistence in Stochastic Volatility

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  • Krämer, Walter
  • Messow, Philip

Abstract

We extend the well established link between structural change and estimated persistence from GARCH to stochastic volatility (SV) models. Whenever structural changes in some model parameters increase the empirical autocorrelations of the squares of the underlying time series, the persistence in volatility implied by the estimated model parameters follows suit. This explains why stochastic volatility often appears to be more persistent when estimated from a larger sample as then the likelihood increases that there might have been some structural change in between.

Suggested Citation

  • Krämer, Walter & Messow, Philip, 2012. "Structural Change and Spurious Persistence in Stochastic Volatility," Ruhr Economic Papers 310, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    • Handle: RePEc:zbw:rwirep:310
    DOI: 10.4419/86788357
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    References listed on IDEAS

    as
    1. Kramer, Walter & Azamo, Baudouin Tameze, 2007. "Structural change and estimated persistence in the GARCH(1,1)-model," Economics Letters, Elsevier, vol. 97(1), pages 17-23, October.
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    More about this item

    Keywords

    Persistence; stochastic volatility; structural change;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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