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Users Guide : Advanced Single Equation Analysis : ARCH and GARCH Estimation : Additional ARCH Models

Additional ARCH Models

The Integrated GARCH (IGARCH) Model

The Threshold GARCH (TARCH) Model
The Exponential GARCH (EGARCH) Model
The Power ARCH (PARCH) Model
The Component GARCH (CGARCH) Model
User Specified Models

In addition to the standard GARCH specification, EViews has the flexibility to estimate several other
variance models. These include IGARCH, TARCH, EGARCH, PARCH, and component GARCH. For each
of these models, the user has the ability to choose the order, if any, of asymmetry.

The Integrated GARCH (IGARCH) Model

If one restricts the parameters of the GARCH model to sum to one and drop the constant term

(25.19)

such that

(25.20)

then we have an integrated GARCH. This model was originally described in Engle and Bollerslev
(1986). To estimate this model, select IGARCH in the Restrictions drop-down menu for the
GARCH/TARCH model.

The Threshold GARCH (TARCH) Model

TARCH or Threshold ARCH and Threshold GARCH were introduced independently by Zakoan (1994)
and Glosten, Jaganathan, and Runkle (1993). The generalized specification for the conditional
variance is given by:

(25.21)

where if and 0 otherwise.

In this model, good news, , and bad news. , have differential effects on the

conditional variance; good news has an impact of , while bad news has an impact of . If

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, bad news increases volatility, and we say that there is a leverage effect for the i-th order. If

, the news impact is asymmetric.

Note that GARCH is a special case of the TARCH model where the threshold term is set to zero. To
estimate a TARCH model, specify your GARCH model with ARCH and GARCH order and then change
the Threshold order to the desired value.

The Exponential GARCH (EGARCH) Model

The EGARCH or Exponential GARCH model was proposed by Nelson (1991). The specification for the
conditional variance is:

(25.22)

Note that the left-hand side is the log of the conditional variance. This implies that the leverage effect
is exponential, rather than quadratic, and that forecasts of the conditional variance are guaranteed to
be nonnegative. The presence of leverage effects can be tested by the hypothesis that . The

impact is asymmetric if .

There are two differences between the EViews specification of the EGARCH model and the original
Nelson model. First, Nelson assumes that the follows a Generalized Error Distribution (GED), while
EViews offers you a choice of normal, Students t-distribution, or GED. Second, Nelson's specification
for the log conditional variance is a restricted version of:

which is an alternative parameterization of the specification above. Estimating the latter model will
yield identical estimates to those reported by EViews except for the intercept term , which will
differ in a manner that depends upon the distributional assumption and the order . For example, in

a model with a normal distribution, the difference will be .

To estimate an EGARCH model, simply select the EGARCH in the model specification dropdown menu
and enter the orders for the ARCH, GARCH and the Asymmetry order.

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Notice that we have specified the mean equation using an explicit expression. Using the explicit
expression is for illustration purposes only; we could just as well entered dlog(ibm) c dlog(spx) as
our specification.

The Power ARCH (PARCH) Model

Taylor (1986) and Schwert (1989) introduced the standard deviation GARCH model, where the
standard deviation is modeled rather than the variance. This model, along with several other models,
is generalized in Ding et al. (1993) with the Power ARCH specification. In the Power ARCH model, the
power parameter of the standard deviation can be estimated rather than imposed, and the optional
parameters are added to capture asymmetry of up to order :

(25.23)

where , for , for all , and .

The symmetric model sets for all . Note that if and for all , the PARCH
model is simply a standard GARCH specification. As in the previous models, the asymmetric effects
are present if .

To estimate this model, simply select the PARCH in the model specification dropdown menu and input
the orders for the ARCH, GARCH and Asymmetric terms. EViews provides you with the option of
either estimating or fixing a value for . To estimate the Taylor-Schwert's model, for example, you
will to set the order of the asymmetric terms to zero and will set to 1.

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The Component GARCH (CGARCH) Model

The conditional variance in the GARCH(1, 1) model:

(25.24)

shows mean reversion to , which is a constant for all time. By contrast, the component model

allows mean reversion to a varying level , modeled as:

(25.25)

Here is still the volatility, while takes the place of and is the time varying long-run

volatility. The first equation describes the transitory component, , which converges to zero

with powers of ( ). The second equation describes the long run component , which

converges to with powers of . is typically between 0.99 and 1 so that approaches very
slowly. We can combine the transitory and permanent equations and write:

(25.26)

which shows that the component model is a (nonlinear) restricted GARCH(2, 2) model.

To select the Component ARCH model, simply choose Component ARCH(1,1) in the Model
dropdown menu. You can include exogenous variables in the conditional variance equation of
component models, either in the permanent or transitory equation (or both). The variables in the
transitory equation will have an impact on the short run movements in volatility, while the variables in
the permanent equation will affect the long run levels of volatility.

An asymmetric Component ARCH model may be estimated by checking the Include threshold term
checkbox. This option combines the component model with the asymmetric TARCH model, introducing

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asymmetric effects in the transitory equation and estimates models of the form:

(25.27)

where are the exogenous variables and is the dummy variable indicating negative shocks.
indicates the presence of transitory leverage effects in the conditional variance.

User Specified Models

In some cases, you might wish to estimate an ARCH model not mentioned above, for example a
special variant of PARCH. Many other ARCH models can be estimated using the logl object. For
example, The Log Likelihood (LogL) Object contains examples of using logl objects for simple
bivariate GARCH models.

Last updated: Tue, 18 Oct 2016 23:23:08 PST

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