Normalized least-squares estimation in time-varying ARCH models

By Piotr Fryzlewicz, Theofanis Sapatinas, S. Rao. 2008

73 citations recorded by the source corpus.

We investigate the time-varying ARCH (tvARCH) process. It is shown that it can be used to describe the slow decay of the sample autocorrelations of the squared returns often observed in financial time series, which warrants the further study of parameter estimation methods for the model. Since the parameters are changing over time, a successful estimator needs to perform well for small samples. We propose a kernel normalized-least-squares (kernel-NLS) estimator which has a closed form, and thus outperforms the previously proposed kernel quasi-maximum likelihood (kernel-QML) estimator for small samples. The kernel-NLS estimator is simple, works under mild moment assumptions and avoids some of the parameter space restrictions imposed by the kernel-QML estimator. Theoretical evidence shows that the kernel-NLS estimator has the same rate of convergence as the kernel-QML estimator. Due to the kernel-NLS estimator's ease of computation, computationally intensive procedures can be used. A prediction-based cross-validation method is proposed for selecting the bandwidth of the kernel-NLS estimator. Also, we use a residual-based bootstrap scheme to bootstrap the tvARCH process. The bootstrap sample is used to obtain pointwise confidence intervals for the kernel-NLS estimator. It is shown that distributions of the estimator using the bootstrap and the ``true'' tvARCH estimator asymptotically coincide. We illustrate our estimation method on a variety of currency exchange and stock index data for which we obtain both good fits to the data and accurate forecasts.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/cb0e09a735be3edf623ec3ed216cb989ce7e8369

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Citations in the corpus

Non‐parametric detection and estimation of structural change (2012, unknown): “kernel-weighted version of the corresponding sample moment; see Robinson (1991) and Fryzlewicz et al. (2008) for estimation in some particular models within this general class.”
Quantile spectral analysis for locally stationary time series (2014, background): “…spectral representations, turned into time domain linear MA(∞) representations by Dahlhaus and Polonik (2006); Dahlhaus and Subba Rao (2006) and Fryzlewicz et al. (2008) deal with locally stationary auto-regressive conditional heteroscedasticity (ARCH) models; although much more general, Zhou…”
Locally stationary long memory estimation (2009, methodology): “This approach was recently used for volatility estimation using time varying (short memory) non-linear processes, see [10,15].”