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Improving Garch Volatility Forecasts

Klaassen,F.J.G.M.
Abstract
Many researchers use GARCH models to generate volatility forecasts. We show, however, that such forecasts are too variable. To correct for this, we extend the GARCH model by distinguishing two regimes with different volatility levels. GARCH effects are allowed within each regime, so that our model generalizes existing regime-switching models that allow for ARCH terms only. The empirical application on U.S. dollar exchange rates shows that our model indeed yields better volatility forecasts than single-regime GARCH and that the allowance for GARCH terms besides ARCH terms can be crucial for the forecast quality.
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Pagination: 42
Date
1998
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Econometrics
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Tilburg University Research Output Collection
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Keywords
GARCH, regime-switching, volatility, forecasting, exchange rates, C52 - Model Evaluation, Validation, and Selection, C53 - Forecasting and Prediction Methods ; Simulation Methods, F31 - Foreign Exchange
Citation
Klaassen, F J G M 1998 'Improving Garch Volatility Forecasts' CentER Discussion Paper, vol. 1998-52, Econometrics, Tilburg.
URI
https://hdl.handle.net/20.500.14602/26470
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