On the Empirical Importance of Periodicity In the Volatility of Financial Time Series

We discuss the empirical importance of long term cyclical effects in the volatility of financial returns. Following ˘Ci˘zek and Spokoiny (2009), Amado and Terasvirta (2012) and others, we consider a general conditionally heteroscedastic process with stationarity property distorted by a deterministic function that governs the possible variability in time of unconditional variance. The function proposed in this paper can be interpreted as a finite Fourier approximation of an Almost Periodic (AP) function as defined by Corduneanu (1989). The resulting model has a particular form of a GARCH process with time varying parameters, intensively discussed in the recent literature. In the empirical analyses we apply a generalisation of the Bayesian AR(1)-t- GARCH(1,1) model for daily returns of S&P500, covering the period of sixty years of US postwar economy, including the recently observed global financial crisis. The results of a formal Bayesian model comparison clearly indicate the existence of significant long term cyclical patterns in volatility with a strongly supported periodic component corresponding to a 14 year cycle. This may be interpreted as empirical evidence in favour of a linkage between the business cycle in the US economy and long term changes in the volatility of the basic stock market index.