Abstract
AbstractThis paper investigates the “spurious almost integration” effect of volatility under a threshold GARCH structure with realized volatility measures. To closely examine the effect, the realized persistence of volatility is proposed to be used as a threshold trigger for volatility regimes. Under the threshold framework, general closed‐form solutions of moment conditions are derived, which provide a convenient way to theoretically examine the “spurious almost integration” effect and its associated impacts. We find that introducing the volatility persistence‐driven threshold can capture regime‐specific characteristics well. It performs better than the traditional GARCH‐type models in terms of both in‐sample fitting and out‐of‐sample forecasting. Based on our Monte Carlo and empirical results, in general we find that overlooking the relatively low‐persistence regime(s) could lead to some misleading conclusions.
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