[R-SIG-Finance] Questions on fitted garch(1,1)

Adams, Zeno Zeno.Adams at ebs.edu
Tue Nov 9 14:22:54 CET 2010


Mark,

>>> If I try to predict the volatility with: predict(garch.fitted) I get
the
>>> "conditional standard deviation predictions" (an interval) for every
>>> period
>>> return in r.
>>>
>>> Q2) Is this a 1 period prediction (i.e. the volatility prediction
for the
>>> next day)? How do I get a prediction for let's say 2 periods in the
>>> future?

No these are not predictions for the next day. The term "predict" is
maybe somewhat misleading. "Fitted Values" is more appropriate, and in
fact both functions give the same results, e.g.

all.equal(predict(garch.fitted)[,1],fitted.values(garch.fitted)[,1])
[1] TRUE

For a two-step-ahead forecast I would use the predict function on the
fGARCH Object and would set the n.ahead argument to 2:

predict(fgarch.fitted, n.ahead = 2)
  meanForecast   meanError standardDeviation
1 0.0005044188 0.008436248       0.008436248
2 0.0005044188 0.008482511       0.008482511


>>> Q3) Why is the meanForecast for all 10 future periods the same?

Because you have just modeled the variance equation and the mean
equation has only a constant. Garch will help you forecasting the
variance of the returns but not the returns themselves. If you want
return forecasts you should model the mean equation, e.g. 

fgarch.fitted <- fGarch::garchFit(~ arma(2,1)+garch(1,1), data =
as.zoo(na.omit(r)), trace =  FALSE)

> predict(fgarch.fitted, n.ahead = 5)
   meanForecast   meanError standardDeviation
1 -0.0009371963 0.008495794       0.008495794
2 -0.0003940789 0.008556624       0.008539586
3  0.0004374707 0.008608828       0.008582793
4  0.0005284133 0.008651758       0.008625429
5  0.0005093462 0.008693970       0.008667503

Hope this helps

Zeno


-----Original Message-----
From: r-sig-finance-bounces at stat.math.ethz.ch
[mailto:r-sig-finance-bounces at stat.math.ethz.ch] On Behalf Of Mark
Breman
Sent: Dienstag, 9. November 2010 12:51
To: Patrick Burns
Cc: r-sig-finance at stat.math.ethz.ch
Subject: Re: [R-SIG-Finance] Questions on fitted garch(1,1)

Hi everyone,

As a followup on my three fitted garch questions;

Yes indeed, if I give the estimated coefficients of fgarch.fitted as
initial
values to garch() the results are much more inline with each other:

> coef(garch(na.omit(r), order = c(1,1),
control=garch.control(start=c(1.3705e-06,8.1789e-02,9.0995e-01))))

 ***** ESTIMATION WITH ANALYTICAL GRADIENT *****


     I     INITIAL X(I)        D(I)

     1     1.370500e-06     1.000e+00
     2     8.178900e-02     1.000e+00
     3     9.099500e-01     1.000e+00

    IT   NF      F         RELDF    PRELDF    RELDX   STPPAR   D*STEP
NPRELDF
     0    1 -1.093e+04
     1   13 -1.093e+04  4.54e-09  1.67e-08  1.1e-09  4.3e+13  2.1e-09
 3.63e+05
     2   24 -1.093e+04 -1.30e-14  2.64e-14  8.1e-15  1.6e+00  1.5e-14
-1.22e-03

 ***** FALSE CONVERGENCE *****

 FUNCTION    -1.093479e+04   RELDX        8.076e-15
 FUNC. EVALS      24         GRAD. EVALS       2
 PRELDF       2.641e-14      NPRELDF     -1.222e-03

     I      FINAL X(I)        D(I)          G(I)

     1    1.372553e-06     1.000e+00    -1.965e+04
     2    8.178900e-02     1.000e+00     2.046e+00
     3    9.099500e-01     1.000e+00    -1.478e+01

          a0           a1           b1
1.372553e-06 8.178900e-02 9.099500e-01

Very nice, thank you!

Now only question 2 and 3 remain a mystery to me.

Kind regards,

-Mark-

2010/11/4 Patrick Burns <patrick at burns-stat.com>

> Taking Alexios' advice will probably
> help, but I wouldn't be surprised if
> they are still not the same.  The
> garch likelihood is extremely tricky
> to optimize -- specialized optimizers
> would be the ideal.
>
> Assuming you can give starting values
> to the optimizer in both cases, you can
> give the other's answer to each and see
> what happens.
>
>
> On 04/11/2010 21:02, alexios wrote:
>
>> The default for fGarch::garchFit is to estimate the mean, assuming a
>> non-zero mean dataset is passed, as can be seen from the returned
"mu"
>> parameter ( a call to 'args(garchFit)' should highlight the
>> 'include.mean' argument ). The default for tseries garch is to assume
>> zero mean data.
>>
>> Demean the data before passing to tseries garch by the estimated 'mu'
>> value from 'fgarch.fitted' and you should obtain closer results.
>>
>> -Alexios
>>
>>
>>
>> On 11/4/2010 8:44 PM, Mark Breman wrote:
>>
>>> Hi everyone,
>>>
>>> I'm trying to predict volatility using a garch(1,1) model and I'm
running
>>> into some interesting issues I cannot find an answer for.
>>>
>>> Suppose I have the following code:
>>>
>>> library(quantmod)
>>> library(tseries)
>>> library(fGarch)
>>>
>>> # get some returns
>>> r = dailyReturn(Ad(getSymbols("SPY", from="2000-01-01",
to="2010-11-04",
>>> auto.assign=F)))
>>>
>>> # fit models
>>> garch.fitted = garch(na.omit(r), order = c(1,1))
>>> fgarch.fitted = fGarch::garchFit(~ garch(1,1), data =
as.zoo(na.omit(r)),
>>> trace = FALSE)
>>>
>>> Now if I look at the values of the coefficients for both fitted
models
>>> they
>>> are not the same:
>>>
>>>  coef(garch.fitted)
>>>>
>>>           a0           a1           b1
>>> 1.339912e-06 8.165689e-02 9.101754e-01
>>>
>>>> coef(fgarch.fitted)
>>>>
>>>           mu        omega       alpha1        beta1
>>> 4.990616e-04 1.370880e-06 8.307080e-02 9.086447e-01
>>>
>>> Q1) Why are they different? What do I have to change to make the
>>> coefficient
>>> values of fgarch.fitted the same as garch.fitted?
>>>
>>> If I try to predict the volatility with: predict(garch.fitted) I get
the
>>> "conditional standard deviation predictions" (an interval) for every
>>> period
>>> return in r.
>>>
>>> Q2) Is this a 1 period prediction (i.e. the volatility prediction
for the
>>> next day)? How do I get a prediction for let's say 2 periods in the
>>> future?
>>>
>>>
>>> If I use predict(fgarch.fitted) I get:
>>>
>>>  predict(fgarch.fitted)
>>>>
>>>    meanForecast   meanError standardDeviation
>>> 1  0.0004990616 0.006677350       0.006677350
>>> 2  0.0004990616 0.006751925       0.006751925
>>> 3  0.0004990616 0.006825079       0.006825079
>>> 4  0.0004990616 0.006896859       0.006896859
>>> 5  0.0004990616 0.006967315       0.006967315
>>> 6  0.0004990616 0.007036491       0.007036491
>>> 7  0.0004990616 0.007104428       0.007104428
>>> 8  0.0004990616 0.007171167       0.007171167
>>> 9  0.0004990616 0.007236745       0.007236745
>>> 10 0.0004990616 0.007301198       0.007301198
>>>
>>> Q3) Why is the meanForecast for all 10 future periods the same?
>>>
>>> Thanks,
>>>
>>> -Mark-
>>>
>>>
>>>
>>> predict(garch)
>>>
>>>        [[alternative HTML version deleted]]
>>>
>>> _______________________________________________
>>> R-SIG-Finance at stat.math.ethz.ch mailing list
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>>>
>>>
>>>
>> _______________________________________________
>> R-SIG-Finance at stat.math.ethz.ch mailing list
>> https://stat.ethz.ch/mailman/listinfo/r-sig-finance
>> -- Subscriber-posting only. If you want to post, subscribe first.
>> -- Also note that this is not the r-help list where general R
questions
>> should go.
>>
>>
> --
> Patrick Burns
> patrick at burns-stat.com
> http://www.burns-stat.com
> http://www.portfolioprobe.com/blog
>
>
> _______________________________________________
> R-SIG-Finance at stat.math.ethz.ch mailing list
> https://stat.ethz.ch/mailman/listinfo/r-sig-finance
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> should go.
>

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