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A Study on Volatility Spurious Almost Integration Effect: A Threshold Realized GARCH Approach

Author

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  • Dinghai Xu

    (Department of Economics, University of Waterloo)

Abstract
This paper investigates the “spurious almost integration” effect of volatility under a threshold GARCH structure with realized volatility measures. To closely examine the effect, the realized persistence of volatility is proposed to be used as a threshold trigger for volatility regimes. Under the threshold framework, general closed-form solutions of moment conditions are derived, which provide a convenient way to theoretically examine the “spurious almost integration” effect and its associated impacts. We find that introducing the volatility persistence-driven threshold can capture regime-specific characteristics well. It performs better than the traditional GARCH-type models in terms of both in-sample fitting and out-of-sample forecasting. Based on our Monte Carlo and empirical results, in general we find that overlooking the relatively low persistence regime(s) could lead to some misleading conclusions.

Suggested Citation

  • Dinghai Xu, 2019. "A Study on Volatility Spurious Almost Integration Effect: A Threshold Realized GARCH Approach," Working Papers 1903, University of Waterloo, Department of Economics, revised Dec 2019.
    • Handle: RePEc:wat:wpaper:1903
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    References listed on IDEAS

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    Cited by:

    1. Xu, Dinghai, 2022. "Canadian stock market volatility under COVID-19," International Review of Economics & Finance, Elsevier, vol. 77(C), pages 159-169.

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    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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