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Likelihood-Based Estimation Of Latent Generalised Arch Structures

Author

Listed:
  • Gabriele Fiorentini

    (Universidad de Alicante)

  • Enrique Sentana

    (CEMFI)

  • Neil Shephard

    (Nuffield College)

Abstract

GARCH models are commonly used as latent processes in econometrics, financial economics and macroeconomics. Yet no exact likelihood analysis of these models has been provided so far. In this paper we outline the issues and suggest a Markov chain Monte Carlo algorithm which allows the calculation of a classical estimator via the simulated EM algorithm or a Bayesian solution in O(T) computational operations, where T denotes the sample size. We assess the performance of our proposed algorithm in the context of both artificial examples and an empirical application to 26 UK sectorial stock returns, and compare it to existing approximate solutions.

Suggested Citation

  • Gabriele Fiorentini & Enrique Sentana & Neil Shephard, 2003. "Likelihood-Based Estimation Of Latent Generalised Arch Structures," Working Papers. Serie AD 2003-06, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  • Handle: RePEc:ivi:wpasad:2003-06
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    Bayesian inference; Dynamic Heteroskedasticity; Factor models;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • G3 - Financial Economics - - Corporate Finance and Governance
    • J1 - Labor and Demographic Economics - - Demographic Economics

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