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Article
Publication date: 3 April 2017

Thomas Walther

This study aims to analyse the conditional volatility of the Vietnam Index (Ho Chi Minh City) and the Hanoi Exchange Index (Hanoi) with a specific focus on their application to…

Abstract

Purpose

This study aims to analyse the conditional volatility of the Vietnam Index (Ho Chi Minh City) and the Hanoi Exchange Index (Hanoi) with a specific focus on their application to risk management tools such as Expected Shortfall (ES).

Design/methodology/approach

First, the author tests both indices for long memory in their returns and squared returns. Second, the author applies several generalised autoregressive conditional heteroskedasticity (GARCH) models to account for asymmetry and long memory effects in conditional volatility. Finally, the author back tests the GARCH models’ forecasts for Value-at-Risk (VaR) and ES.

Findings

The author does not find long memory in returns, but does find long memory in the squared returns. The results suggest differences in both indices for the asymmetric impact of negative and positive news on volatility and the persistence of shocks (long memory). Long memory models perform best when estimating risk measures for both series.

Practical implications

Short-time horizons to estimate the variance should be avoided. A combination of long memory GARCH models with skewed Student’s t-distribution is recommended to forecast VaR and ES.

Originality/value

Up to now, no analysis has examined asymmetry and long memory effects jointly. Moreover, studies on Vietnamese stock market volatility do not take ES into consideration. This study attempts to overcome this gap. The author contributes by offering more insight into the Vietnamese stock market properties and shows the necessity of considering ES in risk management. The findings of this study are important to domestic and foreign practitioners, particularly for risk management, as well as banks and researchers investigating international markets.

Details

Pacific Accounting Review, vol. 29 no. 2
Type: Research Article
ISSN: 0114-0582

Keywords

Article
Publication date: 8 November 2011

Turkhan Ali Abdul Manap and Salina H. Kassim

The purpose of this paper is to examine the long memory property of equity returns and volatility of emerging equity market by focusing on the Malaysian equity market, namely the…

Abstract

Purpose

The purpose of this paper is to examine the long memory property of equity returns and volatility of emerging equity market by focusing on the Malaysian equity market, namely the Kuala Lumpur Stock Exchange (KLSE).

Design/methodology/approach

The study adopts the Fractionally Integrated GARCH (FIGARCH) model and Fractionally Integrated Asymmetric Power ARCH (FIAPARCH), focusing on the Malaysian data covering the period from April 15, 2004 to April 30, 2007.

Findings

The study finds evidence of long memory property as well as asymmetric effects in the volatility of the KLSE. The traditional ARCH/GARCH is shown to be insufficient in modeling the volatility persistence. The FIAPARCH specification outperforms the FIGARCH model by capturing both asymmetry effects and long memory in the conditional variance.

Research limitations/implications

The results of this study have practical implications for the investors intending to invest in the emerging markets such as Malaysia. Understanding volatility and developing the appropriate models are important since volatility can be a measure of risk which is highly relevant in forecasting the conditional volatility of returns for portfolio selection, asset pricing, and value at risk, option pricing and hedging strategies.

Originality/value

This study contributes in providing the empirical evidence on the long memory property of equity returns and volatility of an emerging equity market with reliable estimation models, which is currently lacking, particularly for emerging markets.

Article
Publication date: 23 January 2020

Josephine Dufitinema and Seppo Pynnönen

The purpose of this paper is to examine the evidence of long-range dependence behaviour in both house price returns and volatility for fifteen main regions in Finland over the…

Abstract

Purpose

The purpose of this paper is to examine the evidence of long-range dependence behaviour in both house price returns and volatility for fifteen main regions in Finland over the period of 1988:Q1 to 2018:Q4. These regions are divided geographically into 45 cities and sub-areas according to their postcode numbers. The studied type of dwellings is apartments (block of flats) divided into one-room, two-rooms, and more than three rooms apartments types.

Design/methodology/approach

For each house price return series, both parametric and semiparametric long memory approaches are used to estimate the fractional differencing parameter d in an autoregressive fractional integrated moving average [ARFIMA (p, d, q)] process. Moreover, for cities and sub-areas with significant clustering effects (autoregressive conditional heteroscedasticity [ARCH] effects), the semiparametric long memory method is used to analyse the degree of persistence in the volatility by estimating the fractional differencing parameter d in both squared and absolute price returns.

Findings

A higher degree of predictability was found in all three apartments types price returns with the estimates of the long memory parameter constrained in the stationary and invertible interval, implying that the returns of the studied types of dwellings are long-term dependent. This high level of persistence in the house price indices differs from other assets, such as stocks and commodities. Furthermore, the evidence of long-range dependence was discovered in the house price volatility with more than half of the studied samples exhibiting long memory behaviour.

Research limitations/implications

Investigating the long memory behaviour in both returns and volatility of the house prices is crucial for investment, risk and portfolio management. One reason is that the evidence of long-range dependence in the housing market returns suggests a high degree of predictability of the asset. The other reason is that the presence of long memory in the housing market volatility aids in the development of appropriate time series volatility forecasting models in this market. The study outcomes will be used in modelling and forecasting the volatility dynamics of the studied types of dwellings. The quality of the data limits the analysis and the results of the study.

Originality/value

To the best of the authors’ knowledge, this is the first research that assesses the long memory behaviour in the Finnish housing market. Also, it is the first study that evaluates the volatility of the Finnish housing market using data on both municipal and geographical level.

Details

Journal of European Real Estate Research , vol. 13 no. 1
Type: Research Article
ISSN: 1753-9269

Keywords

Book part
Publication date: 21 November 2018

Siti Mariam Norrulashikin, Fadhilah Yusof, Zulkifli Yusop, Ibrahim Lawal Kane, Norizzati Salleh and Aaishah Radziah Jamaludin

There is evidence that a stationary short memory process that encounters occasional structural break can show the properties of long memory processes or persistence behaviour…

Abstract

There is evidence that a stationary short memory process that encounters occasional structural break can show the properties of long memory processes or persistence behaviour which may lead to extreme weather condition. In this chapter, we applied three techniques for testing the long memory for six daily rainfall datasets in Kelantan area. The results explained that all the datasets exhibit long memory. An empirical fluctuation process was employed to test for structural changes using the ordinary least square (OLS)-based cumulative sum (CUSUM) test. The result also shows that structural change was spotted in all datasets. A long memory testing was then engaged to the datasets that were subdivided into their respective break and the results displayed that the subseries follows the same pattern as the original series. Hence, this indicated that there exists a true long memory in the data generating process (DGP) although structural break occurs within the data series.

Details

Improving Flood Management, Prediction and Monitoring
Type: Book
ISBN: 978-1-78756-552-4

Keywords

Article
Publication date: 7 December 2018

Yi Luo and Yirong Huang

The purpose of this paper is to explore whether stock index volatility series exhibit real long memory.

Abstract

Purpose

The purpose of this paper is to explore whether stock index volatility series exhibit real long memory.

Design/methodology/approach

The authors employ sequential procedure to test structural break in volatility series, and use DFA and 2ELW to estimate long memory parameter for the whole samples and subsamples, and further apply adaptive FIGARCH (AFIGARCH) to describe long memory and structural break.

Findings

The empirical results show that stock index volatility series are characterized by long memory and structural break, and therefore it is appropriate to use AFIGARCH to model stock index volatility process.

Originality/value

This study empirically investigates the properties of long memory and structural break in stock index volatility series. The conclusion has a certain reference value for understanding the properties of long memory and structural break in volatility series for academic researchers, market participants and policy makers, and for modeling and forecasting future volatility, testing market efficiency, pricing financial assets, constructing quantitative investment strategy and measuring market risk.

Details

China Finance Review International, vol. 9 no. 3
Type: Research Article
ISSN: 2044-1398

Keywords

Article
Publication date: 28 February 2022

Edson Zambon Monte

The main goal of this paper is to investigate whether there is long-memory behavior in the CBOE Brazil ETF volatility index (named here VIXBR). As structural breaks may create a…

Abstract

Purpose

The main goal of this paper is to investigate whether there is long-memory behavior in the CBOE Brazil ETF volatility index (named here VIXBR). As structural breaks may create a spurious long-range dependence, the presence of structural breaks is also gauged.

Design/methodology/approach

The study considers the period from October 2011 to March 2021, using daily data. To test the long-memory behavior, three empirical approaches are adopted: GPH, ELW and robust GPH (RGPH) estimator. To estimate the structural break points adopted to date the subsamples, the ICSS algorithm is used.

Findings

Results considering the total period (TP) and subsamples show that the breaks did not create a spurious long-memory behavior and together with the rolling estimation, reveal strong evidence of the long-range dependence in the CBOE Brazil ETF volatility index. The higher degree of persistent of the VIXBR series suggests an extended period of increased uncertainty that agents need consider when making their investment decision.

Research limitations/implications

As possible extension of this study is to investigate the behavior of long memory and structural breaks for different frequencies (weekly, monthly, among others).

Practical implications

The presence of long-range dependence in the CBOE Brazil ETF volatility index reveals that the past information is important for the predictability of risks, and therefore, can help to protect against market risks, which has important implications regarding the future decisions of economic agents (for example, policy makers and investors).

Originality/value

Brazil is an emerging capital market (ECM) that has attracted a great deal of attention from investors and investment funds seeking to diversify its assets. This paper contributes to the empirical financial literature, by studying the long-memory behavior of the CBOE Brazil ETF volatility index, considering possible structural breaks. To the best of knowledge, this has not been done so far.

Details

International Journal of Emerging Markets, vol. 18 no. 11
Type: Research Article
ISSN: 1746-8809

Keywords

Article
Publication date: 17 December 2020

Zhengxun Tan, Yao Fu, Hong Cheng and Juan Liu

This study aims to examine the long memory as well as the effect of structural breaks in the US and the Chinese stock markets. More importantly, it further explores possible…

Abstract

Purpose

This study aims to examine the long memory as well as the effect of structural breaks in the US and the Chinese stock markets. More importantly, it further explores possible causes of the differences in long memory between these two stock markets.

Design/methodology/approach

The authors employ various methods to estimate the memory parameters, including the modified R/S, averaged periodogram, Lagrange multiplier, local Whittle and exact local Whittle estimations.

Findings

China's two stock markets exhibit long memory, whereas the two US markets do not. Furthermore, long memory is robust in Chinese markets even when we test break-adjusted data. The Chinese stock market does not meet the efficient market hypothesis (EMHs), including the efficiency of information disclosure, regulations and supervision, investors' behavior, and trading mechanisms. Therefore, its stock prices' sluggish response to information leads to momentum effects and long memory.

Originality/value

The authors elaborately illustrate how long memory develops by analyzing not only stock market indices but also typical individual stocks in both the emerging China and the developed US, which diversifies the EMH with wider international stylized facts and findings when compared with previous literature. A couple of tests conducted to analyze structural break effects and spurious long memory demonstrate the reliability of the results. The authors’ findings have significant implications for investors and policymakers worldwide.

Details

International Journal of Emerging Markets, vol. 17 no. 5
Type: Research Article
ISSN: 1746-8809

Keywords

Article
Publication date: 2 October 2009

David G. McMillan and Pako Thupayagale

In order to assess the informational efficiency of African equity markets (AEMs), the purpose of this paper is to examine long memory in both equity returns and volatility using…

1187

Abstract

Purpose

In order to assess the informational efficiency of African equity markets (AEMs), the purpose of this paper is to examine long memory in both equity returns and volatility using auto‐regressive fractionally integrated moving average (ARFIMA)‐FIGARCH/hyperbolic GARCH (HYGARCH) models.

Design/methodology/approach

In order to test for long memory, the behaviour of the auto‐correlation function for 11 AEMs is examined. Following the graphical analysis, the authors proceed to estimate ARFIMA‐FIGARCH and ARFIMA‐HYGARCH models, specifically designed to capture longmemory dynamics.

Findings

The results show that these markets (largely) display a predictable component in returns; while evidence of long memory in volatility is very mixed. In comparison, results from the control of the UK and USA show short memory in returns while evidence of long memory in volatility is mixed. These results show that the behaviour of equity market returns and risks are dissimilar across markets and this may have implications for portfolio diversification and risk management strategies.

Practical implications

The results of the analysis may have important implications for portfolio diversification and risk management strategies.

Originality/value

The importance of this paper lies in it being the first to systematically analyse longmemory dynamics for a range of AEMs. African markets are becoming increasingly important as a source of international portfolio diversification and risk management. Hence, the results here have implication for the conduct of international portfolio building, asset pricing and hedging.

Details

Studies in Economics and Finance, vol. 26 no. 4
Type: Research Article
ISSN: 1086-7376

Keywords

Book part
Publication date: 17 December 2003

Ching-Fan Chung, Mao-Wei Hung and Yu-Hong Liu

This study employs a new time series representation of persistence in conditional mean and variance to test for the existence of the long memory property in the currency futures…

Abstract

This study employs a new time series representation of persistence in conditional mean and variance to test for the existence of the long memory property in the currency futures market. Empirical results indicate that there exists a fractional exponent in the differencing process for foreign currency futures prices. The series of returns for these currencies displays long-term positive dependence. A hedging strategy for long memory in volatility is also discussed in this article to help the investors hedge for the exchange rate risk by using currency futures.

Details

Research in Finance
Type: Book
ISBN: 978-1-84950-251-1

Book part
Publication date: 2 March 2011

Khaled Mokni and Faysal Mansouri

In this chapter, we investigate the effect of long memory in volatility on the accuracy of emerging stock markets risk estimation during the period of the recent global financial…

Abstract

In this chapter, we investigate the effect of long memory in volatility on the accuracy of emerging stock markets risk estimation during the period of the recent global financial crisis. For this purpose, we use a short (GJR-GARCH) and long (FIAPARCH) memory volatility models to compute in-sample and out-of-sample one-day-ahead VaR. Using six emerging stock markets index, we show that taking into account the long memory property in volatility modelling generally provides a more accurate VaR estimation and prediction. Therefore, conservative risk managers may adopt long memory models using GARCH-type models to assess the emerging market risks, especially when incorporating crisis periods.

Details

The Impact of the Global Financial Crisis on Emerging Financial Markets
Type: Book
ISBN: 978-0-85724-754-4

Keywords

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