Common persistence in conditional variance: A reconsideration

TL;DR

This paper critiques the flaws in co-persistence theory for conditional variance, introduces a new measure based on decay half-life, and applies an exhaustive search to identify co-persistent vectors in European stock volatilities.

Contribution

It proposes a revised approach to co-persistence in variance using decay half-life and exhaustive search, addressing previous theoretical limitations.

Findings

Identifies flaws in existing co-persistence theory

Introduces decay half-life as a persistence measure

Finds co-persistence in European stock return volatility

Abstract

This paper demonstrates the flaws of co-persistence theory proposed by Bollerslev and Engle (1993) which cause the theory can hardly be applied. With the introduction of the half-life of decay coefficient as the measure of the persistence, and both the weak definition of persistence and co-persistence in variance, this study attempts to solve the problems by using exhaustive search algorithm for obtaining co-persistent vector. In addition, this method is illustrated to research the co-persistence of stock return volatility in 10 European countries.