Modelling and Forecasting Financial Volatility with Realized GARCH Model: A Comparative Study of Skew- t Distributions Using GRG and MCMC Methods

Didit Budi Nugroho (), Adi Setiawan and Takayuki Morimoto
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Didit Budi Nugroho: Master’s Program in Data Science, Universitas Kristen Satya Wacana, Salatiga 50711, Indonesia
Adi Setiawan: Master’s Program in Data Science, Universitas Kristen Satya Wacana, Salatiga 50711, Indonesia
Takayuki Morimoto: Mathematical Sciences, Kwansei Gakuin University, Sanda 669-1330, Japan

Econometrics, 2025, vol. 13, issue 3, 1-27

Abstract: Financial time-series data often exhibit statistically significant skewness and heavy tails, and numerous flexible distributions have been proposed to model them. In the context of the Log-linear Realized GARCH model with Skew- t (ST) distributions, our objective is to explore how the choice of prior distributions in the Adaptive Random Walk Metropolis method and initial parameter values in the Generalized Reduced Gradient (GRG) Solver method affect ST parameter and log-likelihood estimates. An empirical study was conducted using the FTSE 100 index to evaluate model performance. We provide a comprehensive step-by-step tutorial demonstrating how to perform estimation and sensitivity analysis using data tables in Microsoft Excel. Among seven ST distributions—namely, the asymmetric, epsilon, exponentiated half-logistic, Hansen, Jones–Faddy, Mittnik–Paolella, and Rosco–Jones–Pewsey distributions—Hansen’s ST distribution is found to be superior. This study also applied the GRG method to estimate new approaches, including Realized Real-Time GARCH, Realized ASHARV, and GARCH@CARR models. An empirical study showed that the GARCH@CARR model with the feedback effect provides the best goodness of fit. Out-of-sample forecasting evaluations further confirm the predictive dominance of models incorporating real-time information, particularly Realized Real-Time GARCH for volatility forecasting and Realized ASHARV for 1% VaR estimation. The findings offer actionable insights for portfolio managers and risk analysts, particularly in improving volatility forecasts and tail-risk assessments during market crises, thereby enhancing risk-adjusted returns and regulatory compliance. Although the GRG method is sensitive to initial values, its presence in the spreadsheet method can be a powerful and promising tool in working with probability density functions that have explicit forms and are unimodal, high-dimensional, and complex, without the need for programming experience.

Keywords: analysis sensitivity; GRG; predictive likelihood; realized volatility; skew-t distribution (search for similar items in EconPapers)
JEL-codes: B23 C C00 C01 C1 C2 C3 C4 C5 C8 (search for similar items in EconPapers)
Date: 2025
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