[R-SIG-Finance] RUGARCH variance targeting issue

[stoyan.stoyanov]

Hi again,

I am running a TGARCH(1,1) model on a series of adjusted daily stock returns
and get significantly different forecasts when using variance targeting and
when not. However, I feel that the forecast should not be that different.
Could it be that the model is "targeting" the wrong variable (omega instead
of unconditional variance)? Again it could well be a problem with my data or
model, but I do not see anything obviously wrong with either. That's why I'm
attaching the output under both scenarios, as well as my data. The relevant
parts of the code are below. Hopefully you can help. I just don't think that
my long term prediction of sigma should be going to 0...

*Code:*

spec=ugarchspec(variance.model = list(model = "fGARCH", garchOrder = c(1,1),
                        submodel = "TGARCH", external.regressors =
regressors, variance.targeting = TRUE/FALSE),
                 mean.model = list (armaOrder = c(3,3), include.mean = mean,
archm = FALSE, 
                        archpow = 1, arfima = FALSE, external.regressors =
NULL, archex = FALSE),
                 distribution.model = "std", start.pars = list(), fixed.pars
= list())

fit=ugarchfit(spec, data, out.sample = 100, solver = "solnp", solver.control
= list(), 
               fit.control = list(stationarity = 1, fixed.se = 0, scale =
0))

forecast=ugarchforecast(fit, data = NULL, n.ahead = 100, n.roll = 50,
out.sample = 0, 
               external.forecasts = list(mregfor = NULL, vregfor = NULL))

boot.pred=ugarchboot(fit, data = NULL, method = "partial", n.ahead = 10, 
                n.bootfit = 100, n.bootpred = 500, out.sample = 0, rseed =
NA, solver = "solnp", 
                solver.control = list(), fit.control = list(), 
                external.forecasts = list(mregfor = NULL, vregfor = NULL),
parallel = FALSE, 
                parallel.control = list(pkg = c("multicore", "snowfall"),
cores = 2))

P.S. I know that I probably don't need an ARMA(3,3).

*Data + Ouput files:*
http://r.789695.n4.nabble.com/file/n4634631/var.targeting.conditional.forecast.jpeg
var.targeting.conditional.forecast.jpeg 
http://r.789695.n4.nabble.com/file/n4634631/var.targeting.bootstrap.output.jpg.jpeg
var.targeting.bootstrap.output.jpg.jpeg 
http://r.789695.n4.nabble.com/file/n4634631/no.var_targeting.conditional_forecast.jpeg
no.var_targeting.conditional_forecast.jpeg 
http://r.789695.n4.nabble.com/file/n4634631/no.var.targeting.bootstrap.output.jpg
no.var.targeting.bootstrap.output.jpg 
http://r.789695.n4.nabble.com/file/n4634631/var.targeting.fit.txt
var.targeting.fit.txt 
http://r.789695.n4.nabble.com/file/n4634631/no.var.targeting.fit.txt
no.var.targeting.fit.txt 

Thanks,
Stoyan

-----
Stoyan Stoyanov
The University of Chicago Booth School of Business
MBA Class of 2013
(312) 532-0120 | stoyanov at chicagobooth.edu
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