8. Modelling Volatility

  1. Bernhard Pfaff

Published Online: 30 OCT 2012

DOI: 10.1002/9781118477144.ch8

Financial Risk Modelling and Portfolio Optimization with R

Financial Risk Modelling and Portfolio Optimization with R

How to Cite

Pfaff, B. (2012) Modelling Volatility, in Financial Risk Modelling and Portfolio Optimization with R, John Wiley & Sons, Ltd, Chichester, UK. doi: 10.1002/9781118477144.ch8

Author Information

  1. Invesco Global Strategies, Germany

Publication History

  1. Published Online: 30 OCT 2012
  2. Published Print: 28 DEC 2012

ISBN Information

Print ISBN: 9780470978702

Online ISBN: 9781118477144

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Keywords:

  • asymmetric power ARCH (APARCH) model;
  • autocorrelated conditional heteroscedastic (ARCH) model;
  • financial market returns;
  • GARCH model;
  • stylized facts;
  • volatility clustering

Summary

Volatility clustering is one of the stylized facts of financial market returns. Given this stylized fact, the assumption of i.i.d. returns is clearly violated. This chapter introduces a model class that takes volatility clustering explicitly into account. The phenomenon of volatility clustering directly feeds into the derived risk measures for future periods in time. The chapter briefly describes the class of autocorrelated conditional heteroscedastic (ARCH) models, and states that with ARCH models the stylized facts of financial market returns can be captured well. It discusses the baseline ARCH model, and then shifts its focus to the modification and extensions of ARCH models, which include GARCH model and asymmetric power ARCH (APARCH) model. The chapter also provides a synopsis of the packages in R. Finally, it provides the empirical application of volatility models.

Controlled Vocabulary Terms

ARCH model; GARCH model; stylized facts; volatility clustering