Stock market volatility clusters in time, carries a risk premium, is fractionally integrated, and exhibits asymmetric leverage effects relative to returns. This paper develops a first internally consistent equilibrium based explanation for these longstanding empirical facts. The model is cast in...

The dynamic dependencies in financial market volatility are generally well described by a long-memory fractionally integrated process. At the same time, the volatility risk premium, defined as the difference between the ex-post realized volatility and the market’s ex-ante expectation thereof,...

This paper reviews basic notions of return variation in the context of a continuous-time arbitrage-free asset pricing model and discusses some of their applications. We first define return variation in the infeasible continuous-sampling case. Then we introduce realized measures obtained from...

Motivated by the implications from a stylized self-contained general equilibrium model incorporating the effects of time-varying economic uncertainty, we show that the difference between implied and realized variation, or the variance risk premium, is able to explain a non-trivial fraction of...

Forecasting using factor models based on large data sets have received ample attention due to the models’ ability to increase forecast accuracy with respect to a range of key macroeconomic variables in the US and the UK. However, forecasts based on such factor models do not uniformly...

In this paper, we propose two parametric alternatives to the standard GARCH model. They allow the conditional variance to have a smooth time-varying structure of either additive or multiplicative type. The suggested parameterizations describe both nonlinearity and structural change in the...

We address the problem of selecting the common factors that are relevant for forecasting macroeconomic variables. In economic forecasting using diffusion indexes the factors are ordered, according to their importance, in terms of relative variability, and are the same for each variable to...

This paper proposes a model that simultaneously captures long memory and structural breaks. We model structural breaks through irreversible Markov switching or so-called change-point dynamics. The parameters subject to structural breaks and the unobserved states which determine the position of...

This paper examines trends in annual temperature data for the northern and southern hemisphere (1850-2010) by using variants of the shifting-mean autoregressive (SM-AR) model of González and Teräsvirta (2008). Univariate models are first fitted to each series by using the so called QuickShift...

The exponential model for the spectrum of a time series and its fractional extensions are based on the Fourier series expansion of the logarithm of the spectral density. The coefficients of the expansion form the cepstrum of the time series. After deriving the cepstrum of important classes of...