Merits and drawbacks of variance targeting in GARCH models

Christian Francq, Lajos Horvath and Jean-Michel Zakoian

MPRA Paper from University Library of Munich, Germany

Abstract: Variance targeting estimation is a technique used to alleviate the numerical difficulties encountered in the quasi-maximum likelihood (QML) estimation 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 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.

Keywords: Consistency and Asymptotic Normality; GARCH; Heteroskedastic Time Series; Quasi Maximum Likelihood Estimation; Value-at-Risk; Variance Targeting Estimator. (search for similar items in EconPapers)
JEL-codes: C13 C22 (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-ore and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Related works:
Journal Article: Merits and Drawbacks of Variance Targeting in GARCH Models (2011)
Working Paper: Merits and Drawbacks of Variance Targeting in GARCH Models (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:15143

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