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Measuring volatility persistence and long memory in the presence of structural breaks Evidence from African stock markets

Measuring volatility persistence and long memory in the presence of structural breaks Evidence... Purpose – The purpose of this paper is to estimate volatility in African stock markets (ASMs), taking account of periodic level shifts in the mean level of volatility, where the regime shifts are determined endogenously. Design/methodology/approach – Volatility estimates are incorporated into standard volatility models to assess the impact of structural breaks on volatility persistence, long memory and forecasting performance for ASMs. Findings – The results presented here indeed suggest that persistence and long memory in volatility are overestimated when regime shifts are not accounted for. In particular, application of breakpoint tests and a moving average procedure suggest that unconditional volatility displays substantial time variation. Practical implications – A modification of the standard generalised autoregressive conditional heteroscedasticity model to allow for time variation in the unconditional variance generates improved volatility forecasting performance for some African markets. Originality/value – This paper describes one of the first studies to incorporate endogenously determined regime shifts into volatility estimates and assess the impact of structural breaks on volatility persistence, long memory and forecasting performance for ASMs. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Managerial Finance Emerald Publishing

Measuring volatility persistence and long memory in the presence of structural breaks Evidence from African stock markets

Managerial Finance , Volume 37 (3): 23 – Feb 22, 2011

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References (69)

Publisher
Emerald Publishing
Copyright
Copyright © 2011 Emerald Group Publishing Limited. All rights reserved.
ISSN
0307-4358
DOI
10.1108/03074351111113298
Publisher site
See Article on Publisher Site

Abstract

Purpose – The purpose of this paper is to estimate volatility in African stock markets (ASMs), taking account of periodic level shifts in the mean level of volatility, where the regime shifts are determined endogenously. Design/methodology/approach – Volatility estimates are incorporated into standard volatility models to assess the impact of structural breaks on volatility persistence, long memory and forecasting performance for ASMs. Findings – The results presented here indeed suggest that persistence and long memory in volatility are overestimated when regime shifts are not accounted for. In particular, application of breakpoint tests and a moving average procedure suggest that unconditional volatility displays substantial time variation. Practical implications – A modification of the standard generalised autoregressive conditional heteroscedasticity model to allow for time variation in the unconditional variance generates improved volatility forecasting performance for some African markets. Originality/value – This paper describes one of the first studies to incorporate endogenously determined regime shifts into volatility estimates and assess the impact of structural breaks on volatility persistence, long memory and forecasting performance for ASMs.

Journal

Managerial FinanceEmerald Publishing

Published: Feb 22, 2011

Keywords: Africa; Stock markets; Volatility; Variance

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