IDEAS home Printed from https://ideas.repec.org/p/hhs/lunewp/2001_006.html
   My bibliography  Save this paper

GARCH Estimation and Discrete Stock Prices

Author

Listed:
  • Amilon, Henrik

    () (Department of Economics, Lund University)

Abstract

The continuous-state GARCH model is misspecified if applied to returns calculated from discrete price series. This paper proposes modifications of the above model for handling such cases. The focus is on the AR-GARCH framework, but the same ideas could be used for other stochastic processes as well. Using Swedish stock price data and a stochastic optimization algorithm, simulated annealing, I compare the parameter estimates and asymptotic standard errors from the approximative model and the extended models. I find small deviations between the models for longer time series and small tick sizes, but larger differences for shorter series and for larger tick size to price ratios, mainly in the conditional variance parameter estimates. None of the models provide continuous residuals. By constructing generalized residuals, I show how valid residual diagnostic and specification tests can be performed in some cases.

Suggested Citation

  • Amilon, Henrik, 2001. "GARCH Estimation and Discrete Stock Prices," Working Papers 2001:6, Lund University, Department of Economics, revised 03 Aug 2001.
  • Handle: RePEc:hhs:lunewp:2001_006
    as

    Download full text from publisher

    File URL: http://swopec.hhs.se/lunewp/papers/lunewp2001_006.pdf
    Download Restriction: no

    More about this item

    Keywords

    EM estimation; compass rose; stock return modeling; latent variables; generalized residuals;

    JEL classification:

    • C35 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hhs:lunewp:2001_006. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (David Edgerton). General contact details of provider: http://edirc.repec.org/data/delunse.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.