TY - JOUR

T1 - A forecast comparison of volatility models

T2 - Does anything beat a GARCH(1,1)?

AU - Hansen, Peter Reinhard

AU - Lunde, Asger

PY - 2005

Y1 - 2005

N2 - We compare 330 ARCH-type models in terms of their ability to describe the conditional variance. The models are compared out-of-sample using DM-$ exchange rate data and IBM return data, where the latter is based on a new data set of realized variance. We find no evidence that a GARCH(1,1) is outperformed by more sophisticated models in our analysis of exchange rates, whereas the GARCH(1,1) is clearly inferior to models that can accommodate a leverage effect in our analysis of IBM returns. The models are compared with the test for superior predictive ability (SPA) and the reality check for data snooping (RC). Our empirical results show that the RC lacks power to an extent that makes it unable to distinguish "good" and "bad" models in our analysis.

AB - We compare 330 ARCH-type models in terms of their ability to describe the conditional variance. The models are compared out-of-sample using DM-$ exchange rate data and IBM return data, where the latter is based on a new data set of realized variance. We find no evidence that a GARCH(1,1) is outperformed by more sophisticated models in our analysis of exchange rates, whereas the GARCH(1,1) is clearly inferior to models that can accommodate a leverage effect in our analysis of IBM returns. The models are compared with the test for superior predictive ability (SPA) and the reality check for data snooping (RC). Our empirical results show that the RC lacks power to an extent that makes it unable to distinguish "good" and "bad" models in our analysis.

U2 - 10.1002/jae.800

DO - 10.1002/jae.800

M3 - Journal article

VL - 20

SP - 873

EP - 889

JO - Journal of Applied Econometrics

JF - Journal of Applied Econometrics

SN - 0883-7252

IS - 7

ER -