They are grateful for valuable comments from conference participants at the Australasian Meeting of the Econometric Society and an anonymous referee.
How Persistent is Stock Return Volatility? An Answer with Markov Regime Switching Stochastic Volatility Models
Article first published online: 15 JUN 2007
Journal of Business Finance & Accounting
Volume 34, Issue 5-6, pages 1002–1024, June/July 2007
How to Cite
Hwang, S., Satchell, S. E. and Valls Pereira, P. L. (2007), How Persistent is Stock Return Volatility? An Answer with Markov Regime Switching Stochastic Volatility Models. Journal of Business Finance & Accounting, 34: 1002–1024. doi: 10.1111/j.1468-5957.2007.02025.x
- Issue published online: 15 JUN 2007
- Article first published online: 15 JUN 2007
- (Paper received March 2005, revised version accepted November 2006. Online publication June 2007)
- stochastic volatility;
- Markov switching;
Abstract: We propose generalised stochastic volatility models with Markov regime changing state equations (SVMRS) to investigate the important properties of volatility in stock returns, specifically high persistence and smoothness. The model suggests that volatility is far less persistent and smooth than the conventional GARCH or stochastic volatility. Persistent short regimes are more likely to occur when volatility is low, while far less persistence is likely to be observed in high volatility regimes. Comparison with different classes of volatility supports the SVMRS as an appropriate proxy volatility measure. Our results indicate that volatility could be far more difficult to estimate and forecast than is generally believed.