IS STOCHASTIC VOLATILITY MORE FLEXIBLE THAN GARCH?

M. Angeles Carnero, Daniel Peña () and Esther Ruiz ()

Statistics and Econometrics Working Papers from Universidad Carlos III, Departamento de Estadística y Econometría

Abstract: This paper compares the ability of GARCH and ARSV models to represent adequately the main empirical properties usually observed in high frequency financial time series: high kurtosis, small first order autocorrelation of squared observations and slow decay towards zero of the autocorrelation coefficients of squared observations. We show that the ARSV(1) model is more flexible than the GARCH(1,1) model in the sense that it is able to generate series with higher kurtosis and smaller first order autocorrelation of squares for a wider variety of parameter specifications. Our results may help to clarify some puzzles raised in the empirical analysis of real financial time series.

Date: 2001-03
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Working Paper: Is stochastic volatility more flexible than garch?
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