[R-SIG-Finance] Garch question

[Zeno Adams]

<1. Can I use garch model on price series or do I need to transform it
to <return, for example ret<-diff(log(x))?

You cannot use GARCH models on price series since they will not be
stationary in most cases. You will get the sum alpha + beta larger than
1 which results in a parameter violation since the long-run
unconditional variance = constant/1-alpha-beta will be negative.

<2. If yes, then how can I predict the future values

You know Pt. You forecast rt+1. You get Pt+1 = 1 + rt+1*Pt if you use
discrete returns or
Pt+1 = exp[rt+1] + Pt if you use continuously compounded returns, i.e.
ret<-diff(log(x)) as you suggested.

Zeno