[R-SIG-Finance] Problem with garch (tseries)

[michael mathews]

As I mentioned to Joe off list I am dealing with natural Gas prices at
houston ship channel. While I could assemble a longer price series it
seems that nat gas has entered into a new price/volatility regime in
the last two years which I think makes using older data somewhat
problematic.

If garch does not like "small" samples what would be a robust way to
estimate the volatility?

thanks for your input

michael

--- Patrick Burns <patrick at burns-stat.com> wrote:

> These are good points.  But probably a key aspect
> is that garch thinks 800 data points is a small sample,
> and 400 points (at least for daily data) is likely to yield
> parameter estimates that are exceptionally variable.
> 
> Patrick Burns
> patrick at burns-stat.com
> +44 (0)20 8525 0696
> http://www.burns-stat.com
> (home of S Poetry and "A Guide for the Unwilling S User")
> 
> Joe W. Byers wrote:
> 
> >Micheal,
> >
> >Physical natural daily prices are a problem with time series models 
> >especially if the physical asset is storable.  Storable assets means
> 
> >that the prices are not an easy single model time series process but
> a 
> >multi-variate model ie Supply and Demand.  Another problem is the 
> >returns of these prices are not normally distributed especially over
> 
> >short times series. Other things to think about are how liquid are
> these 
> >asset prices, the breath and depth of the markets, are is there a
> well 
> >developed forward market?
> >
> >These do not mean that your model is not going to work, it may just
> not 
> >be robust next time you estimate it.  I would suggest running some 
> >outlier tests for spikes in the prices, looking at volatility
> clustering 
> >around these outliers.  Also consider using a GED GARCH model that
> is 
> >normal distribution under restrictions on the parameters and a
> negative 
> >exponential on others.  My collegues and I and U Tulsa have found
> this 
> >works well for some Power prices and Weather Temps.  I am working on
> it 
> >for other prices series as well.
> >
> >Good Luck
> >Joe
> >
> >michael mathews wrote:
> >  
> >
> >>Hi folks,
> >>I have been playing with garch models to model the volatility in
> >>physical natural prices. 
> >>Here is the issue I have a dataset of 801 daily returns (attached).
> >>If I run
> >>
> >>garchall<-garch(hsc)
> >>
> >> ***** ESTIMATION WITH ANALYTICAL GRADIENT ***** 
> >>
> >>
> >>    
> >>
> >>>summary(garchall)
> >>>      
> >>>
> >>Call:
> >>garch(x = hsc)
> >>
> >>Model:
> >>GARCH(1,1)
> >>
> >>Residuals:
> >>    Min      1Q  Median      3Q     Max 
> >>-4.3424 -0.5734  0.0000  0.6037  4.0501 
> >>
> >>Coefficient(s):
> >>    Estimate  Std. Error  t value Pr(>|t|)    
> >>a0 2.507e-05   9.200e-06    2.726  0.00642 ** 
> >>a1 1.218e-01   2.085e-02    5.840 5.21e-09 ***
> >>b1 8.759e-01   1.937e-02   45.212  < 2e-16 ***
> >>---
> >>Signif. codes:  0 '***' 0.001 '**' 0.01 '*' 0.05 '.' 0.1 ' ' 1 
> >>
> >>Diagnostic Tests:
> >>        Jarque Bera Test
> >>
> >>data:  Residuals 
> >>X-squared = 62.7291, df = 2, p-value = 2.387e-14
> >>
> >>
> >>        Box-Ljung test
> >>
> >>data:  Squared.Residuals 
> >>X-squared = 0.0384, df = 1, p-value = 0.8447
> >>
> >>Now if we run the same model on a subset say the last 351 days we
> get
> >>    
> >>
> >>>garch351<-garch(tail(hsc,351))
> >>>      
> >>>
> >> ***** ESTIMATION WITH ANALYTICAL GRADIENT ***** 
> >>
> >>
> >>    
> >>
> >>>summary(garch351)
> >>>      
> >>>
> >>Call:
> >>garch(x = tail(hsc, 351))
> >>
> >>Model:
> >>GARCH(1,1)
> >>
> >>Residuals:
> >>      Min        1Q    Median        3Q       Max 
> >>-4.171521 -0.424628  0.008727  0.532158  3.962116 
> >>
> >>Coefficient(s):
> >>    Estimate  Std. Error  t value Pr(>|t|)    
> >>a0 2.511e-05   1.589e-05    1.580 0.114167    
> >>a1 1.043e-01   2.950e-02    3.536 0.000406 ***
> >>b1 8.957e-01   2.567e-02   34.896  < 2e-16 ***
> >>---
> >>Signif. codes:  0 '***' 0.001 '**' 0.01 '*' 0.05 '.' 0.1 ' ' 1 
> >>
> >>Diagnostic Tests:
> >>        Jarque Bera Test
> >>
> >>data:  Residuals 
> >>X-squared = 76.3704, df = 2, p-value < 2.2e-16
> >>
> >>
> >>        Box-Ljung test
> >>
> >>data:  Squared.Residuals 
> >>X-squared = 1.2806, df = 1, p-value = 0.2578
> >>
> >>still ok. Now finally we get t the point of this email lets look at
> 352
> >>days of data:
> >>
> >>garch352<-garch(tail(hsc,352))
> >>
> >> ***** ESTIMATION WITH ANALYTICAL GRADIENT ***** 
> >>
> >>
> >>Warning message:
> >>NaNs produced in: sqrt(pred$e) 
> >>    
> >>
> >>>summary(garch352)
> >>>      
> >>>
> >>Call:
> >>garch(x = tail(hsc, 352))
> >>
> >>Model:
> >>GARCH(1,1)
> >>
> >>Residuals:
> >>     Min       1Q   Median       3Q      Max 
> >>-4.16377 -0.58155  0.01454  0.70886 12.41242 
> >>
> >>Coefficient(s):
> >>    Estimate  Std. Error  t value Pr(>|t|)    
> >>a0 2.428e-05   1.556e-05    1.561 0.118632    
> >>a1 1.043e-01   2.947e-02    3.540 0.000400 ***
> >>b1 8.962e-01   2.556e-02   35.058  < 2e-16 ***
> >>---
> >>Signif. codes:  0 '***' 0.001 '**' 0.01 '*' 0.05 '.' 0.1 ' ' 1 
> >>
> >>Diagnostic Tests:
> >>        Jarque Bera Test
> >>
> >>data:  Residuals 
> >>X-squared = 10993.57, df = 2, p-value < 2.2e-16
> >>
> >>
> >>        Box-Ljung test
> >>
> >>data:  Squared.Residuals 
> >>X-squared = 0.1831, df = 1, p-value = 0.6687
> >>
> >>whats up? Any Ideas. 
> >>I have also tried using garchFit from the fSeries package but it
> locks
> >>up completely left it running last night and it was still spinning
> this
> >>morning when I got back to the office.
> >>
> >>thanks in advance
> >>
> >>michael
> >>
> >>    
> >>
> >
> 
=== message truncated ===