1. ARCH and GARCH models英语教案.ppt

ARCH models * RESEARCH IN FINANCE Dr Janusz Brzeszczyński Department of Accountancy, Economics and Finance Heriot-Watt University, Edinburgh ARCH and GARCH models ARCH models were awarded NOBEL PRIZE IN ECONOMICS ‘2003 Author and Nobel Prize winner: Robert F. Engle New York University, New York (now) University of California, San Diego (when ARCH models were invented) ARCH models Features of financial markets prices volatility clustering effect fat tails of the returns distributions leverage effects relationship between the price volatility and the autocorrelation of returns ARCH models Features of financial markets prices Volatility clustering effect High and low changes of financial market prices tend to cluster (group) together. ARCH models Features of financial markets prices Fat tails of the returns distributions Extreme changes of the financial market prices are more likely than in case of normal distribution. Reasons: financial crises, strong reaction to news etc. ARCH models Features of financial markets prices Leverage effects In some markets (eg. stock market) it happens that the absolute changes of some instruments (eg. stock prices) are of a similar magnitude ----- regardless of the current level of the prices. ARCH models Features of financial markets prices Leverage effects For example: Stock price of a company ABC = $ 100 Average daily change = $ 5 Average percentage change = 5% ARCH models Features of financial markets prices Leverage effects If there is a bear market and the stock market goes down: Stock price of a company ABC = $ 50 Average daily change = $ 5 Average percentage change = 10 % ARCH models Features of financial markets prices Relationship between the price volatility and the autocorrelation of returns Autocorrelation accompanies low volatility while there is no autocorrelation when volatility is high. Why? No good explanation, no convincing theory so far; just an empirical observation … ARC