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Analyzing Financial Time Series through Robust Estimators

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  • Grossi Luigi

    (University of Parma)

Abstract

In this paper we suggest an extension of the forward search methodology to GARCH models which are often used for forecasting stock market volatility. It is frequently found that estimated residuals from GARCH models have excess kurtosis, even when one allows for conditional t-distributed errors. Some papers have appeared on outlier detection in GARCH models but the proposed methods are iterative and may suffer from masking effects. The forward search is a method for determining the effect of outliers on fitted parameters and for detecting also masked outliers. In the case of GARCH models outliers are strictly related to extreme observations which are responsible for the well-known volatility clustering of financial returns. It is possible, through the forward search, to visualize the effect on estimated parameters of patches of extremal observations.

Suggested Citation

  • Grossi Luigi, 2004. "Analyzing Financial Time Series through Robust Estimators," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 8(2), pages 1-15, May.
    • Handle: RePEc:bpj:sndecm:v:8:y:2004:i:2:n:3
    DOI: 10.2202/1558-3708.1224
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    References listed on IDEAS

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    1. Engle, Robert F & Sheppard, Kevin K, 2001. "Theoretical and Empirical Properties of Dynamic Conditional Correlation Multivariate GARCH," University of California at San Diego, Economics Working Paper Series qt5s2218dp, Department of Economics, UC San Diego.
    2. Franses, Philip Hans & Ghijsels, Hendrik, 1999. "Additive outliers, GARCH and forecasting volatility," International Journal of Forecasting, Elsevier, vol. 15(1), pages 1-9, February.
    3. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
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    Cited by:

    1. Lisa Crosato & Luigi Grossi, 2019. "Correcting outliers in GARCH models: a weighted forward approach," Statistical Papers, Springer, vol. 60(6), pages 1939-1970, December.
    2. L. Grossi & G. Morelli, 2006. "Robust volatility forecasts and model selection in financial time series," Economics Department Working Papers 2006-SE02, Department of Economics, Parma University (Italy).
    3. M. Angeles Carnero & Daniel Peña & Esther Ruiz, 2008. "Estimating and Forecasting GARCH Volatility in the Presence of Outiers," Working Papers. Serie AD 2008-13, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).

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