第三章-条件异方差模型.pptVIP

* 3.4.1 Weaknesses of ARCH Model It assume that positive and negative shocks have the same effects on volatility. But in practice, the price of a financial asset responds differently to positive and negative shocks. The ARCH model is rather restrictive. 3.4.1 Weaknesses of ARCH Model The ARCH model does not provide any new insight for understanding the source of variations of a financial time series. It merely provides a mechanical way to describe the behavior of the conditional variance. It gives no indication about what causes such behavior to occur. ARCH model are likely to overpredict the volatility because they respond slowly to large isolated shocks to the return series. * * 3.4.3 Building an ARCH Model Details are given below: Order Determination Estimation Model Checking Forecasting * Order Determination One can use the PACF of a2t to determine the ARCH order. From the model we have: For a given sample, a2t is an unbiased estimate of σ2t,therefore, we expect that a2t is linearly related to a2t-1… a2t-m in a manner similar to that of an autoregressive model of order m. * Alternatively, define ηt= a2t-σ2t The ARCH model becomes: PACF of a2t is a useful tool to determine the order m. because {ηt} are not identically distributed, the least squares estimates of the prior model are consistent, but not efficient. * Estimation Under normality, the likelihood function of an ARCH (m) model is * The conditional likelihood function: * Under t-dist, the conditional log likelihood function is Where Г(x) is the usual gamma function. * Using the at=σtεt ,we obtain the conditional likelihood function of at as The degrees of freedom of the t-distribution can be specified a priori or estimated jointly with other parameters. * If the degrees of freedom v of the Student-t distribution is prespecified, then the conditional log likelihood function is: * If one wishes to estimate v jointly with other parameters, then the log likelihood function becomes: * Εt may a