A Volatility Targeting GARCH Model with Time-Varying Coefficients

23 Pages Posted: 24 Aug 2009 Last revised: 6 May 2016

See all articles by Bart Frijns

Bart Frijns

Auckland University of Technology - Faculty of Business & Law

Thorsten Lehnert

University of Luxembourg

Remco C. J. Zwinkels

Vrije Universiteit Amsterdam; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Multiple version iconThere are 2 versions of this paper

Date Written: August 23, 2009

Abstract

The current paper proposes a conditional volatility model with time varying coefficients based on a multinomial switching mechanism. By giving more weight to either the persistence or shock term in a GARCH model, conditional on their relative ability to forecast a benchmark volatility measure, the switching reinforces the persistent nature of the GARCH model. Estimation of this volatility targeting or VT-GARCH model for Dow 30 stocks indicates that the switching model is able to outperform a number of relevant GARCH setups, both in- and out-of-sample, also without any informational advantages.

Keywords: GARCH, time varying coefficients, multinomial logit

JEL Classification: C22, G17

Suggested Citation

Frijns, Bart and Lehnert, Thorsten and Zwinkels, Remco C.J., A Volatility Targeting GARCH Model with Time-Varying Coefficients (August 23, 2009). Journal of Empirical Finance, Vol. 18, 2011. Available at SSRN: https://ssrn.com/abstract=1460256 or http://dx.doi.org/10.2139/ssrn.1460256

Bart Frijns (Contact Author)

Auckland University of Technology - Faculty of Business & Law ( email )

3 Wakefield Street
Private Bag 92006
Auckland Central 1020
New Zealand

Thorsten Lehnert

University of Luxembourg ( email )

6, rue Coudenhove-Kalergi
Luxembourg, L-1359
Luxembourg

Remco C.J. Zwinkels

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, NL-1081HV
Netherlands
+31 20 59 85220 (Phone)

HOME PAGE: http://research.vu.nl/en/persons/remco-zwinkels

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

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