Long Memory in Stock Market Volatility and the Volatility-in-Mean Effect: The FIEGARCH-M Model

Bent Jesper Christensen, Morten Ørregaard Nielsen, Jie Zhu

    Research output: Working paper/Preprint Working paperResearch

    Abstract

    We extend the fractionally integrated exponential GARCH (FIEGARCH) model for
    daily stock return data with long memory in return volatility of Bollerslev and Mikkelsen
    (1996) by introducing a possible volatility-in-mean effect. To avoid that the long memory
    property of volatility carries over to returns, we consider a filtered FIEGARCH-in-mean
    (FIEGARCH-M) effect in the return equation. The filtering of the volatility-in-mean
    component thus allows the co-existence of long memory in volatility and short memory in
    returns. We present an application to the S&P 500 index which documents the empirical
    relevance of our model
    Original languageEnglish
    Place of publicationAarhus
    PublisherInstitut for Økonomi, Aarhus Universitet
    Number of pages17
    Publication statusPublished - 2007

    Keywords

    • FIEGARCH, financial leverage, GARCH, long memory, risk-return tradeoff,

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