The Effect of Long Memory in Volatility on Stock Market Fluctuations

Publikation: Working paperForskning

  • Institut for Økonomi
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.
OriginalsprogEngelsk
UdgivelsesstedAarhus
UdgiverCREATES, Institut for Økonomi, Aarhus Universitet
Antal sider44
StatusUdgivet - 2007

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