A Forecast Comparison of Volatility Models: Does Anything Beat a Garch(1,1)?

Brown Univ. Economics Working Paper No. 01-04

23 Pages Posted: 13 Apr 2001

See all articles by Peter Reinhard Hansen

Peter Reinhard Hansen

University of North Carolina (UNC) at Chapel Hill - Department of Economics; Copenhagen Business School, Finance; Aarhus University - CREATES

Asger Lunde

Aarhus University - School of Economics and Management; CREATES

Date Written: March 22, 2004

Abstract

We compare 330 ARCH-type models in terms of their ability to describe the conditional variance. The models are compared out-of-sample using DM-$ exchange rate data and IBM return data, where the latter is based on a new data set of realized variance. We find no evidence that a GARCH(1,1) is outperformed by more sophisticated models in our analysis of exchange rates, whereas the GARCH(1,1) is clearly inferior to models that can accommodate a leverage effect in our analysis of IBM returns. The models are compared with the test for superior predictive ability (SPA) and the reality check for data snooping (RC). Our empirical results show that the RC lacks power to an extent that makes it unable to distinguish 'good' and 'bad' models in our analysis.

Keywords: Volatility Models, Forecast Comparison, Realized Variance, Superior Predictive Ability

JEL Classification: C12, C13, C15, C22, C52, C53, G15

Suggested Citation

Hansen, Peter Reinhard and Lunde, Asger, A Forecast Comparison of Volatility Models: Does Anything Beat a Garch(1,1)? (March 22, 2004). Brown Univ. Economics Working Paper No. 01-04. Available at SSRN: https://ssrn.com/abstract=264571 or http://dx.doi.org/10.2139/ssrn.264571

Peter Reinhard Hansen (Contact Author)

University of North Carolina (UNC) at Chapel Hill - Department of Economics ( email )

Chapel Hill, NC 27599
United States

HOME PAGE: http://https://sites.google.com/site/peterreinhardhansen/

Copenhagen Business School, Finance ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

Aarhus University - CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Asger Lunde

Aarhus University - School of Economics and Management ( email )

Aarhus
Denmark

CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

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