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Measuring volatility persistence in the presence of sudden changes in the variance of Canadian stock returns
Author(s) -
Malik Farooq,
Ewing Bradley T.,
Payne James E.
Publication year - 2005
Publication title -
canadian journal of economics/revue canadienne d'économique
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.773
H-Index - 69
eISSN - 1540-5982
pISSN - 0008-4085
DOI - 10.1111/j.0008-4085.2005.00315.x
Subject(s) - volatility (finance) , econometrics , economics , forward volatility , autoregressive conditional heteroskedasticity , variance swap , stock (firearms) , stock market , financial economics , volatility swap , persistence (discontinuity) , volatility risk premium , implied volatility , volatility smile , geography , geotechnical engineering , engineering , context (archaeology) , archaeology
. 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