WHY DOES THE STANDARD GARCH(1, 1) MODEL WORK WELL?

DOI10.1142/S0129183107011261MaRDI QIDQ3500189zbMATH OpenFDO

Authors P. Norouzzadeh, G. R. Jafari, Alireza Bahraminasab

Publication date 3 June 2008

Published in International Journal of Modern Physics C (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/physics/0503027

zbMATH Keywords

GARCH processesMarkov processtime series analysis

Mathematics Subject Classification ID

Economic time series analysis (91B84)

Abstract: The AutoRegressive Conditional Heteroskedasticity (ARCH) and its generalized version (GARCH) family of models have grown to encompass a wide range of specifications, each of them is designed to enhance the ability of the model to capture the characteristics of stochastic data, such as financial time series. The existing literature provides little guidance on how to select optimal parameters, which are critical in efficiency of the model, among the infinite range of available parameters. We introduce a new criterion to find suitable parameters in GARCH models by using Markov length, which is the minimum time interval over which the data can be considered as constituting a Markov process. This criterion is applied to various time series and results support the known idea that GARCH(1,1) model works well.

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Cites work

• Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation
• Generalized autoregressive conditional heteroscedasticity
• Modelling critical and catastrophic phenomena in geoscience. A statistical physics approach. Papers based on the lectures at the workshop on `models of earthquakes: physical approaches', Kolkata, India, December 2005.
• Temporal Aggregation of Garch Processes

Cited in

(1)

• Equity premium prediction: taking into account the role of long, even asymmetric, swings in stock market behavior

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