Fractionally Integrated APARCH Modeling of Stock Market Volatility: A multi-country study

Tse (1998) propose a model which combines the fractionally integrated GARCH formulation of Baillie, Bollerslev and Mikkelsen (1996) with the asymmetric power ARCH speci…cation of Ding, Granger and Engle (1993). This paper analyzes the applicability of a multivariate constant conditional correlation version of the model to national stock market returns for eight countries. We …nd this multivariate speci…cation to be generally applicable once power, leverage and long-memory e¤ects are taken into consideration. In addition, we …nd that both the optimal fractional di¤erencing parameter and power transformation are remarkably similar across countries. Out-of-sample evidence for the superior forecasting ability of the multivariate FIAPARCH framework is provided in terms of forecast error statistics and tests for equal forecast accuracy of nested models. Keywords: Asymmetric Power ARCH, Fractional integration, Stock returns, Volatility forecast evaluation. JEL Classi…cation:C13, C22, C52. We would like to thank two anonymous referees and M. Karanassou for their helpful comments and suggestions. Address for correspondence: Economics and Finance, Brunel University, West London, UB3 3PH, UK; email: [email protected], tel: +44 (0)1895265284, fax: +44 (0)1895269770.