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A forecast comparison of volatility models: does anything beat a GARCH(1,1)?

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  • Asger Lunde

    (Department of Information Science, Aarhus School of Business, Denmark)

  • Peter R. Hansen

    (Department of Economics, Brown University, Providence, USA)

Abstract

We compare 330 ARCH-type models in terms of their ability to describe the conditional variance. The models are compared out-of-sample using DM-$ exchange rate data and IBM return data, where the latter is based on a new data set of realized variance. We find no evidence that a GARCH(1,1) is outperformed by more sophisticated models in our analysis of exchange rates, whereas the GARCH(1,1) is clearly inferior to models that can accommodate a leverage effect in our analysis of IBM returns. The models are compared with the test for superior predictive ability (SPA) and the reality check for data snooping (RC). Our empirical results show that the RC lacks power to an extent that makes it unable to distinguish 'good' and 'bad' models in our analysis. Copyright © 2005 John Wiley & Sons, Ltd.

Suggested Citation

  • Asger Lunde & Peter R. Hansen, 2005. "A forecast comparison of volatility models: does anything beat a GARCH(1,1)?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(7), pages 873-889.
  • Handle: RePEc:jae:japmet:v:20:y:2005:i:7:p:873-889
    DOI: 10.1002/jae.800
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