Conditional Heteroscedasticity in Time Series of Stock Returns: Evidence and Forecasts
This article presents new evidence about the time-series behavior of stock prices. Daily return series exhibit significant levels of second-order dependence, and they cannot be modeled as linear white-noise processes. A reasonable return-generating process is empirically shown to be a first-order autoregressive process with conditionally heteroskedastic innovations. In particular, generalized autoregressive conditional heteroskedastic GARCH (1, 1) processes fit to data very satisfactorily. Various out-of-sample forecasts of monthly return variances are generated and compared statistically. Forecasts based on the GARCH model are found to be superior. Copyright 1989 by the University of Chicago.
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