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GARCH processes and the phenomenon of misleading and unambiguous signals

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  • Beatriz Sousa
  • Manuel Cabral Morais
  • Yarema Okhrin
  • Wolfgang Schmid

Abstract

In finance, it is quite usual to assume that a process behaves according to a previously specified target generalized autoregressive conditionally heteroscedastic process. The impact of rumors or other events on this process can be frequently described by an outlier responsible for a short‐lived shift in the process mean or by a sustained change in the process variance. This calls for the use of joint schemes for the process mean and variance. Since changes in the mean and in the variance require different actions from the traders/brokers, this paper provides an account on the probabilities of misleading and unambiguous signals of those joint schemes, thus adding insights on their out‐of‐control performance.

Suggested Citation

  • Beatriz Sousa & Manuel Cabral Morais & Yarema Okhrin & Wolfgang Schmid, 2018. "GARCH processes and the phenomenon of misleading and unambiguous signals," Applied Stochastic Models in Business and Industry, John Wiley & Sons, vol. 34(5), pages 667-681, September.
    • Handle: RePEc:wly:apsmbi:v:34:y:2018:i:5:p:667-681
    DOI: 10.1002/asmb.2334
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