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Likelihood-based estimation of latent generalised ARCH structures

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  • Neil Shephard
  • Gabriele Fiorentini
  • Enrique Sentana

Abstract

GARCH models are commonly used as latent processes in econometrics, financial economics and macroeconomics. Yet no exact likelihood analysis of these models has been provided so far. In this paper we outline the issues and suggest a Markov chain Monte Carlo algorithm which allows the calculation of a classical estimator via the simulated EM algorithm or a Bayesian solution in O(T) computational operations, where T denotes the sample size. We assess the performance of our proposed algorithm in the context of both artificial examples and an empirical application to 26 UK sectorial stock returns, and compare it to existing approximate solutions.

Suggested Citation

  • Neil Shephard & Gabriele Fiorentini & Enrique Sentana, 2003. "Likelihood-based estimation of latent generalised ARCH structures," FMG Discussion Papers dp453, Financial Markets Group.
    • Handle: RePEc:fmg:fmgdps:dp453
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    References listed on IDEAS

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    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General

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