|
Archive@NYU >
Stern School of Business >
Finance Working Papers >
Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/26360
|
| Title: | The Spline-GARCH Model for Low Frequency Volatility and Its Global
Macroeconomic Causes |
| Authors: | F. Engle, Robert
Rangel, Jose Gonzalo |
| Issue Date: | 7-Dec-2006 |
| Series/Report no.: | FIN-07-049 |
| Abstract: | Twenty-five years of volatility research has left the macroeconomic
environment playing a minor role. This paper proposes modeling equity
volatilities as a combination of macroeconomic effects and time series
dynamics. High frequency return volatility is specified to be the
product of a slow-moving component, represented by an exponential
spline, and a unit GARCH. This slow-moving component is the low
frequency volatility, which in this model coincides with the
unconditional volatility. This component is estimated for nearly 50
countries over various sample periods of daily data. Low frequency
volatility is then modeled as a function of macroeconomic and financial
variables in an unbalanced panel with a variety of dependence
structures. It is found to vary over time and across countries. The low
frequency component of volatility is greater when the macroeconomic
factors GDP, inflation, and short-term interest rates are more volatile
or when inflation is high and output growth is low. Volatility is higher
for emerging markets and for markets with small numbers of listed
companies and market capitalization relative to GDP, but also for large
economies. The model allows long horizon forecasts of volatility to
depend on macroeconomic developments, and delivers estimates of the
volatility to be anticipated in a newly opened market. |
| URI: | http://hdl.handle.net/2451/26360 |
| Appears in Collections: | Finance Working Papers
|
All items in Faculty Digital Archive are protected by copyright, with all rights reserved.
|
