Volatility Modeling Using GARCH: Theory and Practice

9 Pages Posted: 26 Nov 2013 Last revised: 10 May 2016

Date Written: May 9, 2016

Abstract

This paper explains why a two-component GARCH model as proposed by Ding and Granger (1996) or Engle and Lee (1999) can be an ideal alternative model for practitioners in modeling stock return volatility. I show that the two-component GARCH model can easily capture the slow hyperbolic decay of the sample autocorrelation function for the absolute or squared returns that is commonly found in empirical data. Compared to the alternative long memory GARCH model, the two-component GARCH model is easy to estimate and implement.

Keywords: GARCH, Volatility Modeling, Long Memory, two-component GARCH model

JEL Classification: C22,C5

Suggested Citation

Ding, Zhuanxin, Volatility Modeling Using GARCH: Theory and Practice (May 9, 2016). Available at SSRN: https://ssrn.com/abstract=2359212 or http://dx.doi.org/10.2139/ssrn.2359212

Zhuanxin Ding (Contact Author)

Analytic Investors ( email )

555 West Fifth Street
50th Floor
Los Angeles, CA 90017
United States

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