Warwick Business School, Financial Econometrics Research Centre
Abstract
This study introduces GARCH models with cross-sectional market volatility, which we call GARCHX model. The cross-sectional market volatility is equlvalent to common heteroskedasticity in asset specific returns, which was suggested by Connor and Linton (2001) as an important component in individual asset volatility. Using UK and US data, we find that daily return volatility can be better specified with GARCHX models, but GARCHX models do not necessarily perform better than conventional GARCH models in forecasting
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