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Asymmetry and Long Memory in Volatility Modelling

Asai, Manabu and McAleer, Michael and Medeiros, Marcelo C. (2011) Asymmetry and Long Memory in Volatility Modelling. [Working Paper or Technical Report] (Unpublished)

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Abstract

A wide variety of conditional and stochastic variance models has been used to estimate latent volatility (or risk). In this paper, we propose a new long memory asymmetric volatility model which captures more flexible asymmetric patterns as compared with several existing models. We extend the new specification to realized volatility by taking account of measurement errors, and use the Efficient Importance Sampling technique to estimate the model. As an empirical example, we apply the new model to the realized volatility of S&P500 to show that the new specification of asymmetry significantly improves the goodness of fit, and that the out-of-sample forecasts and Value-at-Risk (VaR) thresholds are satisfactory. Overall, the results of the out-of-sample forecasts show the adequacy of the new asymmetric and long memory volatility model for the period including the global financial crisis.

Item Type:Working Paper or Technical Report
Additional Information:The authors are most grateful to a Co-Editor, Associate Editor and two referees for very helpful comments and suggestions, and Marcel Scharth for efficient research assistance.
Uncontrolled Keywords:Asymmetric volatility, Long memory, Realized volatility, Measurement errors, Efficient importance sampling.
Subjects:Social sciences > Economics > Econometrics
Series Name:Documentos de trabajo del Instituto Complutense de Análisis Económico
Volume:2011
Number:29
ID Code:13215
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Deposited On:06 Sep 2011 08:05
Last Modified:06 Feb 2014 09:43

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