THE EXPONENTIAL GARCH MODEL
• To allow for asymmetric effects between
positive and negative asset returns, he considers the weighted innovation
• where θ and γ are real constants
• Both t and | t | − E(| t |) are zero-mean iid
• Therefore E[g(t )] = 0
• An EGARCH(m, s) model can be written as
• where α0 is a constant
• The use of g( t ) enables the model to respond
• To better understand the EGARCH model, let
Example
• We consider the monthly log returns of IBM
stock from January 1926 to December 1997 for 864 observations.
• An AR(1)-EGARCH(1, 0) model is entertained