Improving Garch Volatility Forecasts
AbstractMany researchers use GARCH models to generate volatility forecasts. We show, however, that such forecasts are too variable. To correct for this, we extend the GARCH model by distinguishing two regimes with different volatility levels. GARCH effects are allowed within each regime, so that our model generalizes existing regime-switching models that allow for ARCH terms only. The empirical application on U.S. dollar exchange rates shows that our model indeed yields better volatility forecasts than single-regime GARCH and that the allowance for GARCH terms besides ARCH terms can be crucial for the forecast quality.
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Bibliographic InfoPaper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 1998-52.
Date of creation: 1998
Date of revision:
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Web page: http://center.uvt.nl
GARCH; regime-switching; volatility; forecasting; exchange rates;
Find related papers by JEL classification:
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
- F31 - International Economics - - International Finance - - - Foreign Exchange
This paper has been announced in the following NEP Reports:
- NEP-ECM-1998-07-20 (Econometrics)
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