One-Factor-GARCH Models for German Stocks - Estimation and Forecasting
University of Tuebingen - Faculty of Economics and Business Administration
December 17, 1996
Tuebinger Diskussionsbeitraege No. 87
This paper presents theoretical models and their empirical results for the return and variance dynamics of German stocks. A factor structure is used in order to allow for a parsimonious modeling of the first two moments of returns. Dynamic factor models with GARCH dynamics (GARCH(1,1)-M, IGARCH(1,1)-M, Nonlinear Asymmetric GARCH(1,1)-M and Glosten-Jagannathan-Runkle GARCH(1,1)-M) and three different distributions for the disturbances (Normal, Student's t and Generalized Error Distribution) are considered. Out-of-sample forecasts for the stock returns based upon these models are computed. These forecasts are compared with forecasts based on individual GARCH(1,1)-M models, static factor models, naive, random walk and exponential smoothing forecasts.
Number of Pages in PDF File: 53
JEL Classification: C32, G12
Date posted: February 1, 1997
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