Model stability and forecast performance of Beta--EGARCH

Szabolcs Blazsek, Helmuth Chavez and Carlos Mendez

Applied Economics Letters, 2016, vol. 23, issue 17, 1219-1223

Abstract: We show that the model stability of the recent QAR(1) plus Beta-t-EGARCH(1,1) is superior to that of the well-known ARMA(1,1) plus t-GARCH(1,1) because QAR plus Beta-t-EGARCH discounts extreme observations, while ARMA plus t-GARCH accentuates them. Model stability of QAR plus Beta-t-EGARCH is an elegant property; however, we show that the out-of-sample density forecast performance of ARMA plus t-GARCH is superior to that of QAR plus Beta-t-EGARCH. We study model stability and density forecast performance for a set of rolling data windows. We use data on the S&P 500 index for the period 1990–2015. For robustness analysis, we also study Monte Carlo simulations of asset returns for the stochastic volatility model.

Date: 2016
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DOI: 10.1080/13504851.2016.1145343

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