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Nonlinear GARCH models for highly persistent volatility

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  • Lanne, Markku
  • Saikkonen, Pentti

Abstract

In this paper we study new nonlinear GARCH models mainly designed for time series with highly persistent volatility. For such series, conventional GARCH models have often proved unsatisfactory because they tend to exaggerate volatility persistence and exhibit poor forecasting ability. Our main emphasis is on models that are similar to previously introduced smooth transition GARCH models except for the novel feature that a lagged value of conditional variance is used as the transition variable. This choice of the transition variable corresponds to the idea that high persistence in conditional variance is related to relatively infrequent changes in regime. U sing the theory of Markov chains we provide sufficient conditions for the stationarity and existence of moments of the considered smooth transition GARCH models and even some more general nonlinear GARCH models. Empirical applications to two exchange rate return series show that the new models can be superior to conventional GARCH models especially in longer term forecasting. --

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Paper provided by Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes in its series SFB 373 Discussion Papers with number 2002,20.

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Date of creation: 2002
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Handle: RePEc:zbw:sfb373:200220

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Cited by:
  1. Marcelo Cunha Medeiros & Alvaro Veiga, 2004. "Modelling multiple regimes in financial volatility with a flexible coefficient GARCH model," Textos para discussão 486, Department of Economics PUC-Rio (Brazil).
  2. Annastiina Silvennoinen & Timo Teräsvirta, 2005. "Multivariate Autoregressive Conditional Heteroskedasticity with Smooth Transitions in Conditional Correlations," Research Paper Series 168, Quantitative Finance Research Centre, University of Technology, Sydney.
  3. repec:hal:cesptp:halshs-00390636 is not listed on IDEAS
  4. Dueker Michael J. & Psaradakis Zacharias & Sola Martin & Spagnolo Fabio, 2011. "Contemporaneous-Threshold Smooth Transition GARCH Models," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 15(2), pages 1-25, March.
  5. Subbotin, Alexandre, 2009. "Volatility Models: from Conditional Heteroscedasticity to Cascades at Multiple Horizons," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 15(3), pages 94-138.
  6. Malmsten, Hans, 2004. "Evaluating exponential GARCH models," Working Paper Series in Economics and Finance 564, Stockholm School of Economics, revised 03 Sep 2004.
  7. Teräsvirta, Timo, 2006. "An introduction to univariate GARCH models," Working Paper Series in Economics and Finance 646, Stockholm School of Economics.

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