To infinity and beyond: Efficient computation of ARCH(\infty) models

Morten Nielsen and Antoine L. Noël ()
Authors registered in the RePEc Author Service: Antoine L. Noël

No 1425, Working Paper from Economics Department, Queen's University

Abstract: This paper provides an exact algorithm for efficient computation of the time series of conditional variances, and hence the likelihood function, of models that have an ARCH($\infty$) representation. This class of models includes, e.g., the fractionally integrated generalized autoregressive conditional heteroskedasticity (FIGARCH) model. Our algorithm is a variation of the fast fractional difference algorithm of Jensen and Nielsen (2014). It takes advantage of the fast Fourier transform (FFT) to achieve an order of magnitude improvement in computational speed. The efficiency of the algorithm allows estimation (and simulation/bootstrapping) of ARCH($\infty$) models, even with very large data sets and without the truncation of the filter commonly applied in the literature. In Monte Carlo simulations, we show that the elimination of the truncation of the filter reduces the bias of the quasi-maximum-likelihood estimators and improves out-of-sample forecasting. Our results are illustrated in two empirical examples.

Keywords: Circular convolution theorem; Conditional heteroskedasticity; Fast Fourier transform; FIGARCH; Truncation (search for similar items in EconPapers)
JEL-codes: C22 C58 C63 C87 (search for similar items in EconPapers)
Pages: 19 pages
Date: 2020-11
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-ore
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