Volatility Persistence, Long Memory and Time-Varying Unconditional Mean: Evidence from Ten Equity Indices

Posted: 23 May 2008

See all articles by David G. McMillan

David G. McMillan

University of Stirling

Isabel Ruiz

University of Oxford - Harris Manchester College

Abstract

This paper re-examines evidence of volatility persistence and long memory in the light of potential time-variation in the unconditional mean of the volatility series. Daily equity volatility is generally regarded as exhibiting long memory, however, recent evidence has suggested that long memory may be a spurious finding arising from neglected breaks or time-variation in unconditional variance. The results presented here suggested that long memory is apparent when analysed on the assumption that unconditional variance is constant. However, both breakpoint tests and a moving average application suggest that unconditional variance exhibits substantial, although slow moving, time-variation. The apparent long memory property largely disappears when this time-variation is taken into account. A modification of the GARCH model to allow for mean variation generates improved volatility forecasting performance, but only over long horizon. At the daily level the assumption of a constant unconditional variance does not seem to affect forecasts.

Keywords: Volatility, Long Memory, Structural Breaks, Time-Varying Unconditional Variance

JEL Classification: C22, G12

Suggested Citation

McMillan, David G. and Ruiz, Isabel, Volatility Persistence, Long Memory and Time-Varying Unconditional Mean: Evidence from Ten Equity Indices. Quarterly Review of Economics and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1134377

David G. McMillan (Contact Author)

University of Stirling ( email )

Stirling, Scotland FK9 4LA
United Kingdom

Isabel Ruiz

University of Oxford - Harris Manchester College ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

HOME PAGE: http://www.economics.ox.ac.uk/index.php/staff/ruiz/

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