A1712
Title: Mixture memory models for realized volatility
Authors: Giovanni De Luca - University of Naples Parthenope (Italy) [presenting]
Giampiero Gallo - NYU in Florence (Italy)
Abstract: The dynamics of financial volatility shows a behavior characterized by alternating periods of turbulence and relative quiet. We suggest to model it as a mixture memory model where time-varying mixing weights are a function of some forcing variable capable of sudden changes. In choosing a mixture approach we rely on previous evidence on the presence of a short and a long memory component in the observed series. We apply our model to the main Spanish and Italian stock index (IBEX and FTSEMIB, respectively). For the selection of the most appropriate forcing variable, we have analyzed the spread between the sovereign national and German bond rates as well as some variables measuring the German volatility. The results show a good performance in sample, pointing to the fact that fixed weights may be a limitation to an accurate description of volatility behavior.
