menu

School of Economics and Finance

Research menu

No. 593: Modeling Long Memory and Structural Breaks in Conditional Variances: An Adaptive FIGARCH Approach

Richard T. Baillie , Michigan State University and Queen Mary, University of London
Claudio Morana , Michigan State University, Università del Piemonte Orientale and ICER

June 30, 2014

Download full paper

Abstract

This paper introduces a new long memory volatility process, denoted by Adaptive FIGARCH, or A-FIGARCH, which is designed to account for both long memory and structural change in the conditional variance process. Structural change is modeled by allowing the intercept to follow a slowly varying function, specified by Gallant (1984)'s flexible functional form. A Monte Carlo study finds that the A-FIGARCH model outperforms the standard FIGARCH model when structural change is present, and performs at least as well in the absence of structural instability. An empirical application to stock market volatility is also included to illustrate the usefulness of the technique.

J.E.L classification codes: C15, C22, F31

Keywords:FIGARCH, Long memory, Structural change, Stock market volatility

Return to top