GARCH, Outliers, and Forecasting Volatility

Philip Hans Franses and Dick Dijk

Chapter 8 in Nonlinear Financial Econometrics: Forecasting Models, Computational and Bayesian Models, 2011, pp 136-159 from Palgrave Macmillan

Abstract: Abstract High-frequency time series of financial asset returns typically exhibit excess kurtosis and volatility clustering. That is, large observations occur (much) more often than might be expected for a normally distributed variable, and these large returns tend to occur in clusters, resembling sequences of outliers. The generalized autoregressive conditional heteroskedasticity (GARCH) model often is applied to describe these two stylized facts (see Bollerslev et al. 1992). In applications of the GARCH model to stock and exchange-rate returns, it is typically found that the model cannot capture all excess kurtosis in case a conditional normal distribution is assumed for the returns. In response to this failure of the standard GARCH model, conditional distributions with fatter tails than the normal have been used, such as the student t distribution (see Bollerslev 1987; and Baillie and Bollerslev 1989). However, when the properties of returns series are examined more closely, it appears that the excess kurtosis often is caused almost entirely by only a few extreme observations. Following Friedman and Laibson (1989), we consider the possibility that these large returns are caused by extraordinary events that occur only occasionally and, consequently, assume that the observed time series can be described as a GARCH process which is contaminated with outliers.

Keywords: Outlier Detection; Conditional Variance; GARCH Model; Observe Time Series; European Monetary System (search for similar items in EconPapers)
Date: 2011
References: Add references at CitEc
Citations: View citations in EconPapers (2)

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-0-230-29522-3_8

Ordering information: This item can be ordered from
http://www.palgrave.com/9780230295223

DOI: 10.1057/9780230295223_8

Access Statistics for this chapter

More chapters in Palgrave Macmillan Books from Palgrave Macmillan
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().