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Introduction to ARCH & GARCH models

University of IllinoisDepartment of EconomicsEcon 472 Fall 2001 Optional TA HandoutTA Roberto PerrelliIntroduction to ARCH & GARCH modelsRecent developments in financial econometrics suggest the use of nonlineartime series structures to model the attitude of investors toward risk and ex-pected return. For example, Bera and Higgins (1993, ) remarked that a major contribution of the ARCH literature is the finding that apparentchanges in the volatility of economic time series may be predictable andresult from a specific type of nonlinear dependence rather than exogenousstructural changes in variables. Campbell, Lo, and MacKinlay (1997, ) argued that it is both logi-cally inconsistent and statistically inefficient to use volatility measures thatare based on the assumption of constant volatility over some period whenthe resulting series moves through time.

Introduction to ARCH & GARCH models Recent developments in financial econometrics suggest the use of nonlinear time series structures to model the attitude of investors toward risk and ex-pected return. For example, Bera and Higgins (1993, p.315) remarked that “a major contribution of the ARCH literature is the finding that apparent

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