I'm learing ARCH&GARCH model. I have four questions that I don't know the answers

1st: ARCH & GARCH are often used to evaluate equities. Does it mean that ARCH and GARCH are fitter for high volatility market?

2nd: Can I use these two models to estimate Interest Rate market?

3rd: If yes, the accuracy of forecasting depends on lag? In another word, the longer the lag, the better of forecasting?

Ex: if lag is 1 day, I can estimate tomorrow's price by today's price. If lag is 3 day, I can estimate price in 3 day from today's price.

4th: What's the right maximum likelihood function so that I can estimate all parameters in R language?

Thanks in advance

  • 1
    $\begingroup$ You cannot predict prices with ARCH/GARCH. They are models for volatility... $\endgroup$
    – Slug Pue
    Jun 29 '15 at 20:16
  • $\begingroup$ I agree, but in these models rt is the log daily return. I can predit price by rt=ln(P(t+1)/P(t)),right? $\endgroup$
    – Kroll DU
    Jun 29 '15 at 20:19
  • $\begingroup$ No, you start with fitting for example some ARMA model and then try to look for ARCH-effects of the residuals. I would recommend starting by looking into the basics first :) $\endgroup$
    – Slug Pue
    Jun 29 '15 at 20:38

Few comments on your questions:

1) Yes, Arch and Garch are suitable for equities volatility, please see: http://onlinelibrary.wiley.com/doi/10.1002/jae.800/pdf

2) No. These are models of volatility. To model interest rates use CIR, Vasicek or similar.

3) and 4) Check paper above.


Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.