Asymmetry and Long Memory in Volatility Modelling

Asai, Manabu; McAleer, Michael; Medeiros, Marcelo C.

Asymmetry and Long Memory in Volatility Modelling

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Publication date

2011

Authors

Asai, Manabu

McAleer, Michael

Medeiros, Marcelo C.

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https://hdl.handle.net/20.500.14352/49024

Citation

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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.

Description

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.