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Automated model selection in finance: General-to-speci c modelling of the mean and volatility speci cations

  • Alvaro Escribano


    (Universidad Carlos III de Madrid)

  • Genaro Sucarrat


    (BI Norwegian School of Management)

General-to-Specific (GETS) modelling has witnessed major advances over the last decade thanks to the automation of multi-path GETS specification search. However, several scholars have argued that the estimation complexity associated with financial models constitutes an obstacle to multi-path GETS modelling in finance. Making use of a recent result on log-GARCH Models, we provide and study simple but general and flexible methods that automate financial multi-path GETS modelling. Starting from a general model where the mean specification can contain autoregressive (AR) terms and explanatory variables, and where the exponential volatility specification can include log-ARCH terms, asymmetry terms, volatility proxies and other explanatory variables, the algorithm we propose returns parsimonious mean and volatility specifications. The finite sample properties of the methods are studied by means of extensive Monte Carlo simulations, and two empirical applications suggest the methods are very useful in practice.

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Paper provided by Instituto Madrileño de Estudios Avanzados (IMDEA) Ciencias Sociales in its series Working Papers with number 2011-09.

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Date of creation: 23 Jun 2011
Date of revision:
Publication status: Published in Oxford Bulletin of Economics and Statistics
Handle: RePEc:imd:wpaper:wp2011-09
Note: This paper is included in the IMDEA Social Sciences Working Paper Series through the Bank of Spain Excellence Programme
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  10. Andrew Patton, 2006. "Volatility Forecast Comparison using Imperfect Volatility Proxies," Research Paper Series 175, Quantitative Finance Research Centre, University of Technology, Sydney.
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  17. Halbert White, 2000. "A Reality Check for Data Snooping," Econometrica, Econometric Society, vol. 68(5), pages 1097-1126, September.
  18. Genaro Sucarrat & Alvaro Escribano, 2010. "The power log-GARCH model," Economics Working Papers we1013, Universidad Carlos III, Departamento de Economía.
  19. Hendry, David F & Hans-Martin Krolzig, 2003. "The Properties of Automatic Gets Modelling," Royal Economic Society Annual Conference 2003 105, Royal Economic Society.
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