The Effect of Long Memory in Volatility on Stock Market Fluctuations

Bent Jesper Christensen; Morten Ørregaard Nielsen

The Effect of Long Memory in Volatility on Stock Market Fluctuations

Bent Jesper Christensen, Morten Ørregaard Nielsen

Publikation: Bidrag til tidsskrift/Konferencebidrag i tidsskrift /Bidrag til avis › Tidsskriftartikel › Forskning › peer review

Abstract

Recent empirical evidence demonstrates the presence of an important long memory component in realized asset return volatility. We specify and estimate multivariate models for the joint dynamics of stock returns and volatility that allow for long memory in volatility without imposing this property on returns. Asset pricing theory imposes testable cross-equation restrictions on the system that are not rejected in our preferred specifications, which include a strong financial leverage effect. We show that the impact of volatility shocks on stock prices is small and short-lived, in spite of a positive risk-return trade-off and long memory in volatility.

Originalsprog	Engelsk
Tidsskrift	Review of Economics and Statistics
Vol/bind	89
Nummer	4
Sider (fra-til)	684-700
Antal sider	17
ISSN	0034-6535
Status	Udgivet - 2007

Citationsformater

@article{8a7e1c10d57611dcbc43000ea68e967b,

title = "The Effect of Long Memory in Volatility on Stock Market Fluctuations",

abstract = "Recent empirical evidence demonstrates the presence of an important long memory component in realized asset return volatility. We specify and estimate multivariate models for the joint dynamics of stock returns and volatility that allow for long memory in volatility without imposing this property on returns. Asset pricing theory imposes testable cross-equation restrictions on the system that are not rejected in our preferred specifications, which include a strong financial leverage effect. We show that the impact of volatility shocks on stock prices is small and short-lived, in spite of a positive risk-return trade-off and long memory in volatility.",

author = "Christensen, {Bent Jesper} and Nielsen, {Morten {\O}rregaard}",

year = "2007",

language = "English",

volume = "89",

pages = "684--700",

journal = "Review of Economics and Statistics",

issn = "0034-6535",

publisher = "MIT Press",

number = "4",

}

TY - JOUR

T1 - The Effect of Long Memory in Volatility on Stock Market Fluctuations

AU - Christensen, Bent Jesper

AU - Nielsen, Morten Ørregaard

PY - 2007

Y1 - 2007

N2 - Recent empirical evidence demonstrates the presence of an important long memory component in realized asset return volatility. We specify and estimate multivariate models for the joint dynamics of stock returns and volatility that allow for long memory in volatility without imposing this property on returns. Asset pricing theory imposes testable cross-equation restrictions on the system that are not rejected in our preferred specifications, which include a strong financial leverage effect. We show that the impact of volatility shocks on stock prices is small and short-lived, in spite of a positive risk-return trade-off and long memory in volatility.

AB - Recent empirical evidence demonstrates the presence of an important long memory component in realized asset return volatility. We specify and estimate multivariate models for the joint dynamics of stock returns and volatility that allow for long memory in volatility without imposing this property on returns. Asset pricing theory imposes testable cross-equation restrictions on the system that are not rejected in our preferred specifications, which include a strong financial leverage effect. We show that the impact of volatility shocks on stock prices is small and short-lived, in spite of a positive risk-return trade-off and long memory in volatility.

M3 - Journal article

SN - 0034-6535

VL - 89

SP - 684

EP - 700

JO - Review of Economics and Statistics

JF - Review of Economics and Statistics

IS - 4

ER -