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Christian CONRAD (University of Heidelberg, Germany) "Modelling the Forecast Errors: the (MF)^2 GARCH Model"

January 30, 2020 @ 11:30 am - 12:30 pm
FINANCIAL ECONOMETRICS SEMINAR
Time:11:30
Date: 30th of January 2020
Place: Room 3001
Christian CONRAD (University of Heidelberg, Germany) “Modelling the Forecast Errors: the (MF)^2 GARCH Model”
Abstract : We suggest a multiplicative factor multi frequency ((MF)^2) component GARCH model. The model consists of a daily (high-frequency) GARCH component and one or multiple low-frequency components. The low-frequency components are based on MEM equations for the cumulated standardized forecast errors of the GARCH component within the low-frequency periods and capture the counter-cyclical behavior of financial volatility. We derive conditions for strict and weak stationarity of the (MF)^2 GARCH and discuss the news impact function. Since the new model is dynamically complete, it is straightforward to construct multi-step ahead volatility forecasts. We apply the model to forecasting the volatility of the S&P 500, 12 industry portfolios and 5 international stock markets. The (MF)^2 GARCH significantly outperforms the nested one-component GJR GARCH in out-of-sample forecasting.
 
Organizers:
Jean-Michel ZAKOIAN (CREST )
Sponsors:
CREST and ILB
Location:
Address
 : ENSAE ParisTech
5, avenue Henry Le Chatelier
91120 Palaiseau
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