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Estimation Of Star-Garch Models With Iteratively Weighted Least Squares

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  • Murat Midilic

Abstract

This study applies the Iteratively Weighted Least Squares (IWLS) algorithm to a Smooth Transition Autoregressive (STAR) model with conditional variance. Monte Carlo simulations are performed to measure the performance of the algorithm, to compare its performance with the performances of established methods in the literature, and to see the effect of initial value selection method. Simulation results show that low bias and mean squared error are received for the slope parameter estimator from the IWLS algorithm when the real value of the slope parameter is low. In an empirical illustration, STAR-GARCH model is used to forecast daily US Dollar/Australian Dollar and FTSE Small Cap index returns. 1-day ahead out-of-sample forecast results show that forecast performance of the STAR-GARCH model improves with the IWLS algorithm and the model performs better that the benchmark model.

Suggested Citation

  • Murat Midilic, 2016. "Estimation Of Star-Garch Models With Iteratively Weighted Least Squares," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 16/918, Ghent University, Faculty of Economics and Business Administration.
    • Handle: RePEc:rug:rugwps:16/918
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    File URL: http://wps-feb.ugent.be/Papers/wp_16_918.pdf
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    More about this item

    Keywords

    STAR; GARCH; iteratively weighted least squares; Australian Dollar; FTSE;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • C87 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Econometric Software
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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