Improving GARCH Volatility Forecasts

CentER Discussion Paper Series No. 1998-52

43 Pages Posted: 1 Dec 1998

See all articles by Franc Klaassen

Franc Klaassen

University of Amsterdam - Research Institute in Economics & Econometrics (RESAM); Tinbergen Institute

Date Written: May 13, 1998

Abstract

Many researchers use GARCH models to generate volatility forecasts. We show, however, that such forecasts are too variable. To correct for this, we extend the GARCH model by distinguishing two regimes with different volatility levels. GARCH effects are allowed within each regime, so that our model generalizes existing regime-switching models that allow for ARCH terms only. The empirical application on U.S. dollar exchange rates shows that our model indeed yields better volatility forecasts than single-regime GARCH and that the allowance for GARCH terms besides ARCH terms can be crucial for the forecast quality.

JEL Classification: C52, C53, F31

Suggested Citation

Klaassen, Franc, Improving GARCH Volatility Forecasts (May 13, 1998). CentER Discussion Paper Series No. 1998-52. Available at SSRN: https://ssrn.com/abstract=138094 or http://dx.doi.org/10.2139/ssrn.138094

Franc Klaassen (Contact Author)

University of Amsterdam - Research Institute in Economics & Econometrics (RESAM) ( email )

Roetersstraat 11
Amsterdam
Netherlands
+31 20 525 4191 (Phone)
+31 20 525 4254 (Fax)

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

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