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A Closer Look at the Relation between GARCH and Stochastic Autoregressive Volatility

  • Jeff Fleming
  • Chris Kirby

We show that, for three common SARV models, fitting a minimum mean square linear filter is equivalent to fitting a GARCH model. This suggests that GARCH models may be useful for filtering, forecasting, and parameter estimation in stochastic volatility settings. To investigate, we use simulations to evaluate how the three SARV models and their associated GARCH filters perform under controlled conditions and then we use daily currency and equity index returns to evaluate how the models perform in a risk management application. Although the GARCH models produce less precise forecasts than the SARV models in the simulations, it is not clear that the performance differences are large enough to be economically meaningful. Consistent with this view, we find that the GARCH and SARV models perform comparably in tests of conditional value-at-risk estimates using the actual data. , .

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Article provided by Society for Financial Econometrics in its journal Journal of Financial Econometrics.

Volume (Year): 1 (2003)
Issue (Month): 3 ()
Pages: 365-419

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Handle: RePEc:oup:jfinec:v:1:y:2003:i:3:p:365-419
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