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Modelling and forecasting volatility of East Asian Newly Industrialized Countries and Japan stock markets with non-linear models

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  • Guidi, Francesco

Abstract

This paper explores the forecasting performances of several non-linear models, namely GARCH, EGARCH, APARCH used with three distributions, namely the Gaussian normal, the Student-t and Generalized Error Distribution (GED). In order to evaluate the performance of the competing models we used the standard loss functions that is the Root Mean Squared Error, Mean Absolute Error, Mean Absolute Percentage Error and the Theil Inequality Coefficient. Our result show that the asymmetric GARCH family models are generally the best for forecasting NICs indices. We also find that both Root Mean Squared Error and Mean Absolute Error forecast statistic measures tend to choose models that were estimated assuming the normal distribution, while the other two remaining forecast measures privilege models with t-student and GED distribution.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 19851.

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Date of creation: Jan 2010
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Handle: RePEc:pra:mprapa:19851

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Keywords: GARCH; Volatility forecasting; forecast evaluation.;

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  1. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, Econometric Society, vol. 59(2), pages 347-70, March.
  2. De Gooijer, Jan G. & Hyndman, Rob J., 2006. "25 years of time series forecasting," International Journal of Forecasting, Elsevier, Elsevier, vol. 22(3), pages 443-473.
  3. Jun Yu, 2002. "Forecasting volatility in the New Zealand stock market," Applied Financial Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 12(3), pages 193-202.
  4. Franses, Philip Hans & Ghijsels, Hendrik, 1999. "Additive outliers, GARCH and forecasting volatility," International Journal of Forecasting, Elsevier, Elsevier, vol. 15(1), pages 1-9, February.
  5. Thavaneswaran, A. & Appadoo, S.S. & Peiris, S., 2005. "Forecasting volatility," Statistics & Probability Letters, Elsevier, Elsevier, vol. 75(1), pages 1-10, November.
  6. McCurdy, Thomas H & Morgan, Ieuan G, 1988. "Testing the Martingale Hypothesis in Deutsche Mark Futures with Models Specifying the Form of Heteroscedasticity," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 3(3), pages 187-202, July-Sept.
  7. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, Econometric Society, vol. 50(4), pages 987-1007, July.
  8. Baillie, Richard T & Bollerslev, Tim, 2002. "The Message in Daily Exchange Rates: A Conditional-Variance Tale," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 20(1), pages 60-68, January.
  9. Lamoureux, Christopher G & Lastrapes, William D, 1990. "Persistence in Variance, Structural Change, and the GARCH Model," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 8(2), pages 225-34, April.
  10. Kanas, Angelos & Yannopoulos, Andreas, 2001. "Comparing linear and nonlinear forecasts for stock returns," International Review of Economics & Finance, Elsevier, Elsevier, vol. 10(4), pages 383-398, December.
  11. Brailsford, Timothy J. & Faff, Robert W., 1996. "An evaluation of volatility forecasting techniques," Journal of Banking & Finance, Elsevier, Elsevier, vol. 20(3), pages 419-438, April.
  12. Benoit Mandelbrot, 1963. "The Variation of Certain Speculative Prices," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 36, pages 394.
  13. Ding, Zhuanxin & Granger, Clive W. J. & Engle, Robert F., 1993. "A long memory property of stock market returns and a new model," Journal of Empirical Finance, Elsevier, Elsevier, vol. 1(1), pages 83-106, June.
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