Modeling of Long Memory in Volatility Using Wavelets
| Author: | Mgr. Lucie Kraicová |
|---|---|
| Year: | 2013 - summer |
| Leaders: | doc. PhDr. Jozef Baruník Ph.D. |
| Consultants: | |
| Work type: | Finance, Financial Markets and Banking Masters |
| Language: | English |
| Pages: | 121 |
| Awards and prizes: | M.A. with distinction from the Dean of the Faculty of Social Sciences for an excellent state-final examination performance and for an extraordinarily good masters diploma thesis. |
| Link: | |
| Abstract: | This thesis focuses on one of the attractive topics of current financial literature, the application of wavelet-based methods in volatility modeling. It introduces a new, wavelet-based estimator (wavelet Whittle estimator) of a FIEGARCH model, ARCHfamily model capturing long-memory and asymmetry in volatility, and studies its properties. Based on an extensive Monte Carlo experiment, both the behavior of the new estimator in various situations and its relative performance with respect to two more traditional estimators (maximum likelihood estimator and Fourier-based Whittle estimator) are assessed, along with practical aspects of its application. Possible solutions are proposed for most of the issues detected, including suggestion of a new specification of the estimator. This uses maximal overlap discrete wavelet transform instead of the traditionally used discrete wavelet transform, which should improve the estimator performance in all its applications, not only in the case of FIEGARCH model estimation. The thesis concludes that, after optimization of the estimation setup, the wavelet-based estimator may become an attractive robust alternative to the traditional methods. |
