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One-Factor-GARCH Models for German Stocks - Estimation and Forecasting -

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  • Thomas Kaiser

    (Eberhard-Karls-Universitaet Tuebingen, Germany)

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    Abstract

    This paper presents theoretical models and their empirical results for the return and variance dynamics of German stocks. A factor structure is used in order to allow for a parsimonious modeling of the first two moments of returns. Dynamic factor models with GARCH dynamics (GARCH(1,1)-M, IGARCH(1,1)-M, Nonlinear Asymmetric GARCH(1,1)-M and Glosten-Jagannathan-Runkle GARCH(1,1)-M) and three different distributions for the disturbances (Normal, Student's t and Generalized Error Distribution) are considered. Out-of-sample forecasts for the stock returns based upon these models are computed. These forecasts are compared with forecasts based on individual GARCH(1,1)-M models, static factor models, naive, random walk and exponential smoothing forecasts.

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    Bibliographic Info

    Paper provided by EconWPA in its series Econometrics with number 9612007.

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    Length: 34 pages
    Date of creation: 17 Dec 1996
    Date of revision:
    Handle: RePEc:wpa:wuwpem:9612007

    Note: Type of Document - Postscript/tared/gzipped; prepared on HP- UX; to print on Postscript; pages: 34 , 19 ; figures: included (seperate files). Tuebinger Diskussionsbeitraege Nr. 87 Wirtschaftswissenschaftliche Fakultaet Eberhard-Karls-Universitaet Tuebingen
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    Related research

    Keywords: Dynamic Factors; GARCH; Asset Pricing; Forecasting;

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    References

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    1. Ross, Stephen A., 1976. "The arbitrage theory of capital asset pricing," Journal of Economic Theory, Elsevier, vol. 13(3), pages 341-360, December.
    2. West, K.D. & Cho, D., 1993. "The Predictive Ability of Several Models of Exchange Rate Volatility," Working papers 9317r, Wisconsin Madison - Social Systems.
    3. Francis X. Diebold & Marc Nerlove, 1986. "The dynamics of exchange rate volatility: a multivariate latent factor ARCH model," Special Studies Papers 205, Board of Governors of the Federal Reserve System (U.S.).
    4. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
    5. Bollerslev, Tim & Engle, Robert F. & Nelson, Daniel B., 1986. "Arch models," Handbook of Econometrics, in: R. F. Engle & D. McFadden (ed.), Handbook of Econometrics, edition 1, volume 4, chapter 49, pages 2959-3038 Elsevier.
    6. Engle, Robert F & Lilien, David M & Robins, Russell P, 1987. "Estimating Time Varying Risk Premia in the Term Structure: The Arch-M Model," Econometrica, Econometric Society, vol. 55(2), pages 391-407, March.
    7. Akgiray, Vedat, 1989. "Conditional Heteroscedasticity in Time Series of Stock Returns: Evidence and Forecasts," The Journal of Business, University of Chicago Press, vol. 62(1), pages 55-80, January.
    8. Ng, Victor & Engle, Robert F. & Rothschild, Michael, 1992. "A multi-dynamic-factor model for stock returns," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 245-266.
    9. Bollerslev, Tim & Engle, Robert F & Wooldridge, Jeffrey M, 1988. "A Capital Asset Pricing Model with Time-Varying Covariances," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 116-31, February.
    10. Glosten, Lawrence R & Jagannathan, Ravi & Runkle, David E, 1993. " On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks," Journal of Finance, American Finance Association, vol. 48(5), pages 1779-1801, December.
    11. Bollerslev, Tim, 1987. "A Conditionally Heteroskedastic Time Series Model for Speculative Prices and Rates of Return," The Review of Economics and Statistics, MIT Press, vol. 69(3), pages 542-47, August.
    12. Engle, Robert F & Ng, Victor K, 1993. " Measuring and Testing the Impact of News on Volatility," Journal of Finance, American Finance Association, vol. 48(5), pages 1749-78, December.
    13. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March.
    14. Antoine Frachot, 1995. "Factor Models Of Domestic And Foreign Interest Rates With Stochastic Volatilities," Mathematical Finance, Wiley Blackwell, vol. 5(2), pages 167-185.
    15. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59.
    16. Lamoureux, Christopher G & Lastrapes, William D, 1990. "Persistence in Variance, Structural Change, and the GARCH Model," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(2), pages 225-34, April.
    17. Lee, Tom K Y & Tse, Y K, 1991. "Term Structure of Interest Rates in the Singapore Asian Dollar Market," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 6(2), pages 143-52, April-Jun.
    18. Bollerslev, Tim & Engle, Robert F, 1993. "Common Persistence in Conditional Variances," Econometrica, Econometric Society, vol. 61(1), pages 167-86, January.
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    Cited by:
    1. G.R. Pasha & Tahira Qasim & Muhammad Aslam, 2007. "Estimating and Forecasting Volatility of Financial Time Series in Pakistan with GARCH-type Models," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 12(2), pages 115-149, Jul-Dec.

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