Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/176015
Authors: 
Scharth, Marcel
Medeiros, Marcelo C.
Year of Publication: 
2006
Series/Report no.: 
Texto para discussão 532
Abstract: 
Does volatility reflect a continuous reaction to past shocks or changes in the markets induce shifts in the volatility dynamics? In this paper, we provide empirical evidence that cumulated price variations convey meaningful information about multiple regimes in the realized volatility of stocks, where large falls (rises) in prices are linked to persistent regimes of high (low) variance in stock returns. Incorporating past cumulated daily returns as a explanatory variable in a flexible and systematic nonlinear framework, we estimate that falls of different magnitudes over less than two months are associated with volatility levels 20% and 60% higher than the average of periods with stable or rising prices. We show that this effect accounts for large empirical values of long memory parameter estimates. Finally, we analyze that the proposed model significantly improves out of sample performance in relation to standard methods. This result is more pronounced in periods of high volatility.
Subjects: 
Realized volatility
long memory
nonlinear models
asymmetric effects
regime switching
regression trees
smooth transition
value-at-risk
forecasting
empirical finance.
Document Type: 
Working Paper
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