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The specification of GARCH models with stochastic covariates

✍ Scribed by Jeff Fleming; Chris Kirby; Barbara Ostdiek

Publisher
John Wiley and Sons
Year
2008
Tongue
English
Weight
238 KB
Volume
28
Category
Article
ISSN
0270-7314

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✦ Synopsis

Abstract

A number of studies investigate whether various stochastic variables explain changes in return volatility by specifying the variables as covariates in a GARCH(1, 1) or EGARCH(1, 1) model. The authors show that these models impose an implicit constraint that can obscure the true role of the covariates in the analysis. They illustrate the problem by reconsidering the role of contemporaneous trading volume in explaining ARCH effects in daily stock returns. Once the constraint imposed in earlier research is relaxed, it is found that specifying volume as a covariate does little to diminish the importance of lagged squared returns in capturing the dynamics of volatility. Β© 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28:911–934, 2008

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