| dc.description.abstract | In this paper, we examine the cross-sectional determinants of firm characteristics that explain the long memory in stock volatility. From the view of behavioral finance, the number of noise traders is larger than rational arbitrageurs; the price diverges significantly from fundamental values then drives the volatility persistence. Investors tend to underreact to public information and overreact to private information and trade more when they are optimistic. All of those behaviors drive the phenomena of long memory in return volatility. We find that firms with larger market capitalization, higher percentage of institutional ownership, lower dispersion in cash flow from operations, older history, and wider analyst coverage, have higher degrees of long memory in return volatility. Firms with lower arbitrage risk also have higher degrees of long memory. We also examine regime switching model to see what firm characteristics and investor behavior could force the long memory in volatility. And we find that lower arbitrage risk, lower bid-ask spread, lower stock price, higher trading volume, larger firm, higher number of institution owners, higher percentage of institutional ownership, and older history drive higher transition probabilities in both states. This result is consistent with that of Diebold and Inoue (2001) where when both p00 and p11 are large, it appears that the parameter d of GPH model is away from zero, in other words, drive the volatility persistence.
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