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Influence of deterministic trend on the estimated parameters of GARCH(1,1) model

Author

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  • Calin Vamos

    ("T. Popoviciu" Institute of Numerical Analysis, Romanian Academy, Romania)

  • Maria Craciun

    ("T. Popoviciu" Institute of Numerical Analysis, Romanian Academy, Romania)

Abstract

The log returns of financial time series are usually modeled by means of the stationary GARCH(1,1) stochastic process or its generalizations which can not properly describe the nonstationary deterministic components of the original series. We analyze the influence of deterministic trends on the GARCH(1,1) parameters using Monte Carlo simulations. The statistical ensembles contain numerically generated time series composed by GARCH(1,1) noise superposed on deterministic trends. The GARCH(1,1) parameters characteristic for financial time series longer than one year are not affected by the detrending errors. We also show that if the ARCH coefficient is greater than the GARCH coefficient, then the estimated GARCH(1,1) parameters depend on the number of monotonic parts of the trend and on the ratio between the trend and the noise amplitudes.

Suggested Citation

  • Calin Vamos & Maria Craciun, 2007. "Influence of deterministic trend on the estimated parameters of GARCH(1,1) model," Papers 0709.1536, arXiv.org, revised Sep 2007.
    • Handle: RePEc:arx:papers:0709.1536
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    File URL: http://arxiv.org/pdf/0709.1536
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