Varying coefficient GARCH versus local constant volatility modeling: comparison of the predictive power

Arbeitspapier

GARCH models are widely used in financial econometrics. However, we show by mean of a simple simulation example that the GARCH approach may lead to a serious model misspecification if the assumption of stationarity is violated. In particular, the well known integrated GARCH effect can be explained by nonstationarity of the time series. We then introduce a more general class of GARCH models with time varying coefficients and present an adaptive procedure which can estimate the GARCH coefficients as a function of time. We also discuss a simpler semiparametric model in which the ¯ - parameter is fixed. Finally we compare the performance of the parametric, time varying nonparametric and semiparametric GARCH(1,1) models and the locally constant model from Polzehl and Spokoiny (2002) by means of simulated and real data sets using different forecasting criteria. Our results indicate that the simple locally constant model outperforms the other models in almost all cases. The GARCH(1,1) model also demonstrates a relatively good forecasting performance as far as the short term forecasting horizon is considered. However, its application to long term forecasting seems questionable because of possible misspecification of the model parameters.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: SFB 649 Discussion Paper ; No. 2006,033

Classification and Topics

• Classification: Wirtschaft ; Semiparametric and Nonparametric Methods: General ; Single Equation Models; Single Variables: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes ; Forecasting Models; Simulation Methods

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Polzehl, Jörg ; Spokoiny, Vladimir
• Event: Veröffentlichung
• (who): Humboldt University of Berlin, Collaborative Research Center 649 - Economic Risk
• (where): Berlin
• (when): 2006

Further information

• Handle: http://hdl.handle.net/10419/25116
• Last update: 10.03.2025, 11:44 AM CET