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The Mean Variance Mixing GARCH (1,1) model

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  • Lars Forsberg
  • Anders Eriksson

Abstract

Here we present a general framework for a GARCH (1,1) type of process with innovations with a probability law of the mean- variance mixing type, therefore we call the process in question the mean variance mixing GARCH \ (1,1) or MVM GARCH\(1,1). One implication is a GARCH\ model with skewed innovations and constant mean dynamics. This is achieved without using a location parameter to compensate for time dependence that affects the mean dynamics. From a probabilistic viewpoint the idea is straightforward. We just construct our stochastic process from the desired behavior of the cumulants. Further we provide explicit expressions for the unconditional second to fourth cumulants for the process in question. In the paper we present a specification of the MVM-GARCH process where the mixing variable is of the inverse Gaussian type. On the basis on this assumption we can formulate a maximum likelihood based approach for estimating the process closely related to the approach used to estimate an ordinary GARCH (1,1). Under the distributional assumption that the mixing random process is an inverse Gaussian i.i.d process the MVM-GARCH process is then estimated on log return data from the Standard and Poor 500 index. An analysis for the conditional skewness and kurtosis implied by the process is also presented in the paper

Suggested Citation

  • Lars Forsberg & Anders Eriksson, 2004. "The Mean Variance Mixing GARCH (1,1) model," Econometric Society 2004 Australasian Meetings 323, Econometric Society.
  • Handle: RePEc:ecm:ausm04:323
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    References listed on IDEAS

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    More about this item

    Keywords

    GARCH Skewness Conditional Skewness;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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