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Forecasting ability of GARCH vs Kalman filter method: evidence from daily UK time-varying beta

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  • Taufiq Choudhry

    (School of Management, University of Southampton, UK)

  • Hao Wu

    (School of Management, University of Southampton, UK)

Abstract

This paper investigates the forecasting ability of four different GARCH models and the Kalman filter method. The four GARCH models applied are the bivariate GARCH, BEKK GARCH, GARCH-GJR and the GARCH-X model. The paper also compares the forecasting ability of the non-GARCH model: the Kalman method. Forecast errors based on 20 UK company daily stock return (based on estimated time-varying beta) forecasts are employed to evaluate out-of-sample forecasting ability of both GARCH models and Kalman method. Measures of forecast errors overwhelmingly support the Kalman filter approach. Among the GARCH models the GJR model appears to provide somewhat more accurate forecasts than the other bivariate GARCH models. Copyright © 2008 John Wiley & Sons, Ltd.

Suggested Citation

  • Taufiq Choudhry & Hao Wu, 2008. "Forecasting ability of GARCH vs Kalman filter method: evidence from daily UK time-varying beta," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 27(8), pages 670-689.
    • Handle: RePEc:jof:jforec:v:27:y:2008:i:8:p:670-689
    DOI: 10.1002/for.1096
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