Small sample properties of GARCH estimates and persistence
Soosung Hwang () and
Pedro Valls Pereira ()
The European Journal of Finance, 2006, vol. 12, issue 6-7, 473-494
It is shown that the ML estimates of the popular GARCH(1,1) model are significantly negatively biased in small samples and that in many cases converged estimates are not possible with Bollerslev's non-negativity conditions. Results also indicate that a high level of persistence in GARCH(1,1) models obtained using a large number of observations has autocorrelations lower than these ML estimates suggest in small samples. Considering the size of biases and convergence errors, it is proposed that at least 250 observations are needed for ARCH(1) models and 500 observations for GARCH(1,1) models. A simple measure of how much GARCH conditional volatility explains squared returns is proposed. The measure indicates that for a typical index return volatility whose ARCH parameter is very small, the conditional volatility hardly explains squared returns.
Keywords: Small sample; volatility; GARCH; persistence (search for similar items in EconPapers)
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Working Paper: Small Sample Properties of GARCH Estimates and Persistence (2003)
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