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Contemporaneous aggregation of GARCH processes

Zaffaroni, Paolo (2000) Contemporaneous aggregation of GARCH processes. EM (378). Suntory and Toyota International Centres for Economics and Related Disciplines, London, UK.

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We study the impact of large cross-sections of contemporaneous aggregation of GARCH processes and of dynamic GARCH factor models. The results crucially depend on the shape of the cross-sectional distribution of the GARCH coefficients and on the cross-sectional dependence properties of the rescaled innovation. The aggregate maintains the core nonlinearity of a volatility model, uncorrelation in the levels but autocorrelation in the squares, when the rescaled innovation is common across units. The nonlinearity is, however, lost at the aggregate level, when the rescaled innovation is orthogonal across units. This is not a consequence of the usual result of a vanishing importance of purely idiosyncratic risk as, under appropriate conditions, this is simply not fully diversifiable in arbitrary large portfolios. Non-GARCH memory properties arise at the aggregate level. Strict stationarity, ergodicity and finite kurtosis might fail for the aggregate despite the micro GARCH do satisfy these properties. Under no conditions aggregation of GARCH induces long memory conditional heteroskedasticity.

Item Type: Monograph (Discussion Paper)
Official URL:
Additional Information: © 2000 Paolo Zaffaroni
Divisions: STICERD
Subjects: H Social Sciences > HB Economic Theory
JEL classification: C - Mathematical and Quantitative Methods > C4 - Econometric and Statistical Methods: Special Topics > C43 - Index Numbers and Aggregation
C - Mathematical and Quantitative Methods > C3 - Econometric Methods: Multiple; Simultaneous Equation Models; Multiple Variables; Endogenous Regressors > C32 - Time-Series Models
Date Deposited: 09 Jul 2008 16:49
Last Modified: 18 Dec 2020 00:49

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