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Unbiased QML Estimation of Log-GARCH Models in the Presence of Zero Returns

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  • Sucarrat, Genaro
  • Escribano, Alvaro

Abstract

A critique that has been directed towards the log-GARCH model is that its log-volatility specification does not exist in the presence of zero returns. A common ``remedy" is to replace the zeros with a small (in the absolute sense) non-zero value. However, this renders Quasi Maximum Likelihood (QML) estimation asymptotically biased. Here, we propose a solution to the case where actual returns are equal to zero with probability zero, but zeros nevertheless are observed because of measurement error (due to missing values, discreteness approximisation error, etc.). The solution treats zeros as missing values and handles these by combining QML estimation via the ARMA representation with the Expectation-maximisation (EM) algorithm. Monte Carlo simulations confirm that the solution corrects the bias, and several empirical applications illustrate that the bias-correcting estimator can make a substantial difference.

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  • Sucarrat, Genaro & Escribano, Alvaro, 2013. "Unbiased QML Estimation of Log-GARCH Models in the Presence of Zero Returns," MPRA Paper 50699, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:50699
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    References listed on IDEAS

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    1. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-370, March.
    2. Sucarrat, Genaro & Grønneberg, Steffen & Escribano, Alvaro, 2016. "Estimation and inference in univariate and multivariate log-GARCH-X models when the conditional density is unknown," Computational Statistics & Data Analysis, Elsevier, vol. 100(C), pages 582-594.
    3. Harvey,Andrew C., 2013. "Dynamic Models for Volatility and Heavy Tails," Cambridge Books, Cambridge University Press, number 9781107630024, September.
    4. Francq, Christian & Wintenberger, Olivier & Zakoïan, Jean-Michel, 2013. "GARCH models without positivity constraints: Exponential or log GARCH?," Journal of Econometrics, Elsevier, vol. 177(1), pages 34-46.
    5. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
    6. repec:dau:papers:123456789/10571 is not listed on IDEAS
    7. Christian T. Brownlees & Fabrizio Cipollini & Giampiero M. Gallo, 2011. "Multiplicative Error Models," Econometrics Working Papers Archive 2011_03, Universita' degli Studi di Firenze, Dipartimento di Statistica, Informatica, Applicazioni "G. Parenti", revised Apr 2011.
    8. 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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    1. Sucarrat, Genaro & Grønneberg, Steffen & Escribano, Alvaro, 2016. "Estimation and inference in univariate and multivariate log-GARCH-X models when the conditional density is unknown," Computational Statistics & Data Analysis, Elsevier, vol. 100(C), pages 582-594.
    2. Francq, Christian & Sucarrat, Genaro, 2017. "An equation-by-equation estimator of a multivariate log-GARCH-X model of financial returns," Journal of Multivariate Analysis, Elsevier, vol. 153(C), pages 16-32.
    3. Escribano, Alvaro & Sucarrat, Genaro, 2018. "Equation-by-equation estimation of multivariate periodic electricity price volatility," Energy Economics, Elsevier, vol. 74(C), pages 287-298.
    4. Christian Francq & Genaro Sucarrat, 2018. "An Exponential Chi-Squared QMLE for Log-GARCH Models Via the ARMA Representation," Journal of Financial Econometrics, Oxford University Press, vol. 16(1), pages 129-154.

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    More about this item

    Keywords

    ARCH; exponential GARCH; log-GARCH; ARMA; Expectation-Maximisation (EM);
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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