Merits and Drawbacks of Variance Targeting in GARCH Models

Christian Francq and Lajos Horvath
Authors registered in the RePEc Author Service: Jean-Michel Zakoian

Journal of Financial Econometrics, 2011, vol. 9, issue 4, 619-656

Abstract: Variance targeting estimation (VTE) is a technique used to alleviate the numerical difficulties encountered in the quasi-maximum likelihood estimation (QMLE) of GARCH models. It relies on a reparameterization of the model and a first-step estimation of the unconditional variance. The remaining parameters are estimated by quasi maximum likelihood (QML) in a second step. This paper establishes the asymptotic distribution of the estimators obtained by this method in univariate GARCH models. Comparisons with the standard QML are provided and the merits of the variance targeting method are discussed. In particular, it is shown that when the model is misspecified, the VTE can be superior to the QMLE for long-term prediction or value-at-risk calculation. An empirical application based on stock market indices is proposed. Copyright The Author 2011. Published by Oxford University Press. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

Date: 2011
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Citations: View citations in EconPapers (54)

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Related works:
Working Paper: Merits and Drawbacks of Variance Targeting in GARCH Models (2009)
Working Paper: Merits and drawbacks of variance targeting in GARCH models (2009)
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