Weighted trimmed likelihood estimator for GARCH models
Generalized autoregressive heteroskedasticity (GARCH) models are widely used to reproduce stylized facts of ﬁnancial time series and today play an essential role in risk management and volatility forecasting. But despite extensive research, problems are still encountered during parameter estimation in the presence of outliers. Here we show how this limitation can be overcome by applying the robust weighted trimmed likelihood estimator (WTLE) to the standard GARCH model. We suggest a fast implementation and explain how the additional robust parameter can be automatically estimated. We compare our approach with other recently introduced robust GARCH estimators and show through the results of an extensive simulation study that the proposed estimator provides robust and reliable estimates with a small computation cost. Moreover, the proposed fully automatic method for selecting the trimming parameter obviates the tedious ﬁne tuning process required by other models to obtain a “robust” parameter, which may be appreciated by practitioners.
|Date of creation:||Oct 2010|
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- Tim Bollerslev, 1986.
"Generalized autoregressive conditional heteroskedasticity,"
EERI Research Paper Series
EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
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- Čížek, Pavel, 2008.
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- Cizek, P., 2004. "General Trimmed Estimation : Robust Approach to Nonlinear and Limited Dependent Variable Models," Discussion Paper 2004-130, Tilburg University, Center for Economic Research.
- Neykov, N. & Filzmoser, P. & Dimova, R. & Neytchev, P., 2007. "Robust fitting of mixtures using the trimmed likelihood estimator," Computational Statistics & Data Analysis, Elsevier, vol. 52(1), pages 299-308, September.
- Charles, Amelie & Darne, Olivier, 2005. "Outliers and GARCH models in financial data," Economics Letters, Elsevier, vol. 86(3), pages 347-352, March.
- Tim Bollerslev, 2008. "Glossary to ARCH (GARCH)," CREATES Research Papers 2008-49, School of Economics and Management, University of Aarhus.
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