Volatility Persistence and Switching ARCH in Japanese Stock Returns

Abstract

Standard ARCH-GARCH models usually impute a high degree of persistence toconditional volatility. This persistence may be spurious if theconditional volatility is subject to structural change. This paper appliesthe Switching ARCH(SWARCH) model of Hamilton and Susmel (1994) toinvestigate regime shifts and volatility persistence in the Japanese stockmarket. We find that the SWARCH model provides a better description of thedata and implies a much lower degree of volatility persistence thanconventional ARCH models.