Structural change and spurious persistence in stochastic volatility
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Date
2011-12-06
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Abstract
We extend the well established link between structural change and estimated persistence from GARCH to stochastic volatility (SV)
models. Whenever structural changes in some model parameters increase the empirical autocorrelations of the squares of the
underlying time series, the persistence in volatility implied by the estimated model parameters follows suit. This explains why
stochastic volatility often appears to be more persistent when estimated from a larger sample as then the likelihood increases
that there might have been some structural change in between.
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Keywords
persistence, stochastic volatility, structural change