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Likelihood-based estimation of latent generalised ARCH structures

Author

Listed:
  • Gabriele Fiorentini
  • Enrique Sentana
  • Neil Shephard

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, 2004. "Likelihood-based estimation of latent generalised ARCH structures," OFRC Working Papers Series 2004fe02, Oxford Financial Research Centre.
    • Handle: RePEc:sbs:wpsefe:2004fe02
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    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General

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