Modeling volatility in sector index returns with GARCH models using an iterated algorithm

Farooq Malik, Syed Aun Hassan

Research output: Contribution to journalArticlepeer-review

21 Scopus citations

Abstract

Financial market participants are interested in knowing what events can alter the volatility pattern of financial assets and how unanticipated shocks determine the persistence of volatility over time. The present paper studies these issues by detecting time periods of sudden changes in volatility by using the iterated cumulated sums of squares (ICSS) algorithm. Examining five major sectors from January 1992 to August 2003, we found that accounting for volatility shifts in the standard GARCH model considerably reduces the estimated volatility persistence. Our results have important implications regarding asset pricing, risk management, and portfolio selection.

Original languageEnglish (US)
Pages (from-to)211-225
Number of pages15
JournalJournal of Economics and Finance
Volume28
Issue number2
DOIs
StatePublished - 2004
Externally publishedYes

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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