292
Chapter 14
Research Data Analysis
Using EViews:
An Empirical Example of
Modeling Volatility
Erginbay Uğurlu
Istanbul Aydın University, Turkey
ABSTRACT
The aim of this chapter is to provide a detailed empirical example of autoregressive
conditional heteroskedasticity (ARCH) model and selected generalized ARCH models.
Before the ARCH/GARCH models are estimated, several calculations and tests
should be done. The mean model is determined using the autocorrelation function
and partial autocorrelation function and also the unit root test. The existence of
ARCH effect is tested using ARCH-LM test. After these steps are done, then ARCH/
GARCH models can be estimated. All these theoretical aspects are applied to Sofia
Stock Indexes (SOFIX) using EViews 9 software package. The windows and output
of EViews are presented. To show the output’s academic writing format researchers’
outputs are presented in a table.
INTRODUCTION
Modeling volatility is an important issue in the finance literature. Over the last decades
many models have developed in the literature for modeling volatility. Financial
data show the conditional distribution of high-frequency returns this conditional
distribution produce some features. The most challenging features are excess of
DOI: 10.4018/978-1-5225-8437-7.ch014
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Research Data Analysis Using EViews
kurtosis, negative skewness, and temporal persistence in conditional movements. To
cope with these problems many tools have developed not only to model volatility but
also forecasting volatility, namely ARCH/GARCH (Auto-Regressive Conditionally
Heteroscedastic/Generalized Auto-Regressive Conditionally Heteroscedastic)
models. After the GARCH model, many different GARCH-type models are developed
such as EGARCH, IGARCH, TARCH so on.
This chapter serves as an overview of important members of the ARCH family,
which are an ARCH, GARCH, and EGARCH models. Also, the empirical example is
presented using EViews 9 software package. Daily observations of Bulgarian Stock
Exchange (SOFIX) data covering the period between 04.01.2010 and 26.01.2017
will be used as an example.
This chapter is organized as follows. The first part is an introduction and the
second part covers the history y of the ARCH, GARCH, and EGARCH models. The
third part is the core of the paper and provides a guide to the estimation procedure
of three models in EViews 9. In the last part, the chapter is, summarized.
BACKGROUND OF GARCH MODELS
Whereas heteroskedasticity is associated with models for cross-section data in
textbooks, autoregressive conditional heteroskedasticity (ARCH) can be found in
time-series models. Volatility is a vital concept for financial series. It is used in
portfolio optimization, risk management, and asset pricing. The main problem of
this kind of data is the impossibility of modeling using a linear model because this
kind of data includes leptokurtosis, volatility clustering, long memory, volatility
smile, and leverage effects. Also, one of the assumptions of linear models, which is
homoscedasticity is not appropriate when using financial data (Floros 2008:35). In
order to model volatility, Engle (1982) developed the Autoregressive Conditional
Heteroscedastic (ARCH) models. Engle observed that large and small errors tend
to occur in clusters, and then formulated it as follows: information from the recent
past might influence the conditional disturbance variance. After Engle, Bollerslev
(1986) extended ARCH to Generalized Autoregressive Conditional Heteroscedastic
(GARCH) model. Bollerslev’s improvement is to add the forecasted variance from
the last period (the GARCH term) to the volatility of the past (ARCH term). Nelson
(1991) proposed the Exponential GARCH (EGARCH) model an EGARCH model
that is often employed to capture the asymmetric effect of innovations on volatility.
It is not the last GARCH type model, but in this chapter, we investigate only these
three models.
293
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