A Volatility Targeting GARCH Model with Time-Varying Coefficients
23 Pages Posted: 24 Aug 2009 Last revised: 6 May 2016
Date Written: August 23, 2009
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: Suggested Citation