Indirect Estimation of α-Stable Garch Models
AbstractIt is a well-known fact that financial returns exhibit conditional heteroscedasticity and fat tails. While the GARCH-type models are very popular in depicting the conditional heteroscedasticity, the α-stable distribution is a natural candidate for the conditional distribution of financial returns. The α-stable distribution is a generalization of the normal distribution and is described by four parameters, two of which deal with tail-thickness and asymmetry. However, practical implementation of α-stable distribution in finance applications has been limited by its estimation difficulties. In this paper, we propose an indirect approach of estimating GARCH models with α-stable innovations by using as auxiliary models GARCH-type models with Student's t distributed innovations. We provide comprehensive empirical evidence on the performance of the method within a series of Monte Carlo simulation studies and an empirical application to financial returns.
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Bibliographic InfoPaper provided by Department of Economics, University of Konstanz in its series Working Paper Series of the Department of Economics, University of Konstanz with number 2012-31.
Length: 22 pages
Date of creation: 23 Nov 2012
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-12-10 (All new papers)
- NEP-ECM-2012-12-10 (Econometrics)
- NEP-ETS-2012-12-10 (Econometric Time Series)
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