Estimating and forecasting volatility of stock indices using

asymmetric GARCH models and (Skewed) Student-t

densities
Jean-Philippe Peters

Ecole dAdministration des Aaires, University of Li`ege, Belgium

March 20, 2001
Abstract
This paper examines the forecasting performance of four GARCH(1,1) models (GARCH,
EGARCH, GJR and APARCH) used with three distributions (Normal, Student-t and Skewed
Student-t). We explore and compare dierent possible sources of forecasts improvements:
asymmetry in the conditional variance, fat-tailed distributions and skewed distributions.
Two major European stock indices (FTSE 100 and DAX 30) are studied using daily data
over a 15-years period. Our results suggest that improvements of the overall estimation are
achieved when asymmetric GARCH are used and when fat-tailed densities are taken into
account in the conditional variance. Moreover, it is found that GJR and APARCH give
better forecasts than symmetric GARCH. Finally increased performance of the forecasts is
not clearly observed when using non-normal distributions.
Keywords: (Density-) Forecasts; GARCH; Asymmetry; Ox; Stock market indices.
JEL classication: C13,C22,C53,G15

Ecole dAdministration des Aaires, Universite de Li`ege, Boulevard du Rectorat,7, B.31/54, B-4000 Li`ege,
Belgium. E-mail: jp.peters@ulg.ac.be
1 Introduction
Some well-known characteristics are common to many nancial time series. Volatility clustering
is often observed (i.e. large changes tend to be followed by large changes and small changes tend
to be followed by small changes; see Mandelbrot, 1963, for early evidence). Second, nancial time
series often exhibit leptokurtosis, meaning that the distribution of their returns is fat-tailed (i.e.
the kurtosis exceed the kurtosis of a standard Gaussian distribution, see Mandelbrot, 1963, or
Fama, 1965). Moreover, the so-called leverage eect, rst noted in Black (1976), refers to the
fact that changes in stock prices tend to be negatively correlated with changes in volatility (i.e.
volatility is higher after negative shocks than after positive shocks of same magnitude).
In a seminal paper, Engle (1982) propose to model time-varying conditional variance with the
AutoRegressive Conditional Heteroskedasticity (ARCH) processes that use past disturbances to
model the variance of the series. Early empirical evidence show that high ARCH order has to
be selected in order to catch the dynamic of the conditional variance. The Generalized ARCH
(GARCH) model of Bollerslev (1986) is an answer to this issue. It is based on an innite ARCH
specication and it allows to reduce the number of estimated parameters from to only 2. Both
models allow to take the rst two characteristics into account, but their distribution is symmetric
and fail therefore to model the third stylized fact, namely the leverage eect. To solve this
problem, many nonlinear extensions of the GARCH model have been proposed. Among the most
widely spread are the Exponential GARCH (EGARCH) of Nelson (1991), the so-called GJR of
Glosten, Jagannathan, and Runkle (1993) and the Asymmetric Power ARCH (APARCH) of Ding,
Granger, and Engle (1993)
1
.
Unfortunately, GARCH models often do not fully capture the thick tails property of high fre-
quency nancial times series. This has naturally led to the use of non normal distributions to
better model this excess kurtosis. Bollerslev (1987), Baillie and Bollerslev (1989), Kaiser (1996)
and Beine, Laurent, and Lecourt (2000) among others use Student-t distribution while Nelson
(1991) and Kaiser (1996) suggest the Generalised Error Distribution (GED). Other propositions
include mixture distributions such as the normal-Poisson (?, 1988), the normal-lognormal (Hsieh,
1989) or the Bernoulli-normal (Vlaar and Palm, 1993). Moreover, to better capture the skewness,
Liu and Brorsen (1995) applies an asymmetric stable density. But the variance of such a distribu-
tion rarely exist. A promising distribution that models both the skewness and the kurtosis is the
Skewed Student-t of Fernandez and Steel (1998), extended to the GARCH framework by Lambert
1
Other famous asymmetric GARCH include the Threshold GARCH (TGARCH) of Zakoian (1994), the
Quadratic GARCH (QGARCH) of Sentana (1995), the Volatility Switching ARCH (VS-ARCH) of Fornari and
Mele (1996), or the Logistic Smooth Transition ARCH (LST-ARCH) of Gonzales-Rivera (1996) and Hagerud
(1996).
2
and Laurent (2000,2001).
Forecasting conditional variance with asymmetric GARCH models has been studied in several
papers (see, e.g., Pagan and Schwert, 1990, Brailsford and Fa, 1996, Franses, Neele, and Van Dijk,
1998 or Loudon, Watt, and Yadav, 2000). On the other hand, comparing normal density with
non-normal ones also has been explored in many occasions (see, e.g., Hsieh, 1989, Baillie and
Bollerslev, 1989, Peters, 2000 or Lambert and Laurent, 2001). This paper couples these two
approaches: we study the forecasting performance of the GARCH, EGARCH, GJR and APARCH
models and we also introduce dierent densities (Normal, Student-t and Skewed Student-t). The
forecasts are made on two major european stock indices: the FTSE 100 and the DAX 30. Several
performance measurements are used to compare the results.
The structure this paper is as follows. Section 2 presents the GARCH models used in this
study. Densitites are described in Section 3. Section 4 reports the empirical ndings of both
estimation and forecasting while Section 5 concludes.
2 The GARCH Models
Let us consider an univariate time series y
t
. If
t1
is the information set (i.e. all the information
available) at time t 1, we can dene its functional form as:
y
t
= E[y
t
|
t1
] +
t
(1)
where E[.|.] denotes the conditional expectation operator and
t
is the disturbance term (or un-
predictable part), with E[
t
] = 0 and E[
t

s
] = 0, t = s.
The
t
term in equation (1) is the innovation of the process. The conditional expectation
is the expectation conditional to all past information available at time t-1. The Autoregressive
Conditional Heteroscedastic (ARCH) process of Engle (1982) is any {
t
} of the form

t
= z
t

t
(2)
where z
t
is an independently and identically distributed (i.i.d.) process, E(z
t
) =0, Var (z
t
) =1 and
where
t
is a time-varying, positive and measurable function of the information set at time t 1.
By denition,
t
is serially uncorrelated with mean zero, but its conditional variance equals
2
t
and,
therefore, may change over time, contrary to what is assumed in OLS estimations. Specically,
the ARCH(q) model is given by

2
t
=
0
+
q

i=1

2
ti
(3)
3
The models considered in this paper are all ARCH-type.
2
They dier on the functional form
of
2
t
but the basic logic is the same.
2.1 GARCH
The Generalized ARCH (GARCH) model of Bollerslev (1986) can be expressed as
3

2
t
=
0
+
q

i=1

2
ti
+
p

j=1

2
tj
(4)
Using the lag or backshift operator L, the GARCH (p, q) model is

2
t
=
0
+(L)
2
t
+(L)
2
t
(5)
with (L) =
1
L+
2
L
2
+...+
q
L
q
and (L) =
1
L+
2
L
2
+...+
p
L
p
.
Based on equation 5, it is straightforward to show that the GARCH model is based on an
innite ARCH specication. If all the roots of the polynomial 1 (L) = 0 of equation 5 lie
outside the unit circle, we have
2
t
=
0
[1 (L)]
1
+(L) [1 (L)]
1

2
t
or equivalently

2
t
=

0
11...p
+

i=1

2
ti
,
which may be seen as an ARCH() process since the conditional variance linearly depends on all
previous squared residuals.
2.2 EGARCH
Our rst asymmetric GARCH model is the Exponential GARCH (EGARCH) model of Nelson
(1991) :
ln
2
t
=
0
+
q

i=1

i
g(z
ti
) +
p

j=1

i
ln(
2
tj
) (6)
where z
t
=
t
t
is the normalized residuals series.
The value of g(z
t
) depends on several elements. Nelson (1991) notes that, to accommodate
the asymmetric relation between stock returns and volatility changes (. . . ) the value of g(z
t
) must
be a function of both the magnitude and the sign of z
t
. That is why he suggests to express the
function g(.) as
g(z
t
) =
1
z
t
..
sign effect
+
2
[|z
t
| E|z
t
|]
. .
magnitude effect
(7)
2
Other methods to model volatility heteroskedasticity include Stochastic Volatility (SV) models ( reviewed, for
instance, in Taylor, 1994) or Threshold AutoRegressive (TAR) model (see Cao and Tsay,1992).
3
The covariance stationarity condition is
p

i=1

i
+
q

j=1

j
< 1.
4
Another advantage of this specication is that i does not require any stationary constraint.
Notice moreover that E|z
t
| depends on the assumption made on the unconditional density. This
point will be claried in Section 3.
2.3 GJR
This popular model is proposed by Glosten, Jagannathan, and Runkle (1993). Its generalized
version is given by:

2
t
=
0
+
q

i=1
(
i

2
ti
+
i
S

ti

2
ti
) +
p

j=1

2
tj
(8)
where S

t
is a dummy variable.
4
In this model, it is assumed that the impact of
2
t
on the conditional variance
2
t
is dierent when

t
is positive or negative. That is why the dummy variable S

t
takes the value 0 (respectively
1) when
t
is positive (negative). Note that the TGARCH model of Zakoian (1994) is very similar
to the GJR but models the conditional standard deviation instead of the conditional variance.
2.4 APARCH
Ding, Granger, and Engle (1993) introduce the Asymmetric Power ARCH (APARCH) model. The
APARCH (p, q) model can be expressed as:

t
=
0
+
q

i=1

i
(|
ti
|
i

ti
)

+
p

j=1

tj
(9)
where
0
> 0, 0,
j
0 (j = 1, ..., p),
i
0 and 1 <
i
< 1 (i = 1, ..., q).
5
This model is quite interesting since it couples the exibility of a varying exponent with the
asymmetry coecient (to take the leverage eect into account). Moreover, the APARCH in-
cludes seven other ARCH extensions as special cases:
6
4
The covariance stationarity condition is
p

i=1

i
(1 +
2
i
) +
q

j=1

j
< 1.
5
Following Ding, Granger, and Engle (1993), if
q

i=1

i
E(|z|
i
z)

+
p

j=1

j
< 1, a stationary solution for equa-
tion (9) exists and is:
E
_

t
_
=

0
1
q

i=1

i
(|z|
i
z)

j=1

j
.
Notice that if we set = 0, = 2 and z
t
is zero mean and unit variance, we have the usual stationarity condition of
the GARCH(1,1) model (
1
+
1
< 1). For further details on the derivation of E(|z| z)

, refer to Ding, Granger,

and Engle (1993) for the Gaussian case, to Paolella (1997) for various non standardized densities and to Lambert
and Laurent (2000) for the Skewed Student-t.
6
Complete developments leading to these conclusions are available in Ding, Granger, and Engle (1993).
5
ARCH when = 2,
i
= 0 (i = 1,. . . ,p) and
j
= 0 (j = 1,. . . ,p).
GARCH when = 2 and
i
= 0 (i = 1,. . . ,p).
Taylor (1986)/Schwert (1990)s GARCH when = 1, and
i
= 0 (i = 1,. . . ,p).
GJR when = 2.
TARCH when = 1.
NARCH when
i
= 0 (i = 1,. . . ,p) and
j
= 0 (j = 1,. . . ,p).
The Log-ARCH of Geweke (1986) and Pentula (1986), when 0.
3 The Densities
The GARCH models are estimated using a maximum likelihood (ML) approach. The logic of
ML is to interpret the density as a function of the parameters set, conditional on a set of sample
outcomes. This function is called the likelihood function.
As already noted in Section 1, nancial time-series often exhibits non-normality patterns,
i.e. excess kurtosis and skewness. Bollerslev and Wooldridge (1992) propose a Quasi Maximum
Likelihood method (hereafter QML) that is robust to departure from normality. Indeed Weiss
(1986) and Bollerslev and Wooldridge (1992) show that under the normality assumption, the
QML estimator is consistent if the conditional mean and the conditional variance are correctly
specied. This estimator is, however, inecient with the degree of ineciency increasing with the
degree of departure from normality (Engle and Gonzalez-Rivera, 1991).
Since it may be expected that excess kurtosis and skewness displayed by the residuals of
conditional heteroscedasticity models will be reduced when a more appropriate distribution is
used, we consider three distributions in this study: the Normal, the Student-t (including a tail
parameter) and the Skewed Student-t (including a tail parameter and an asymmetric parameter).
3.1 Gaussian
The Normal distribution is by far the most widely used distribution when estimating and fore-
casting GARCH models. If we express the mean equation as in equation (1) and
t
= z
t

t
, the
log-likelihood function of the standard normal distribution is given by
L
T
=
1
2
T

t=1
_
ln(2) + ln
_

2
t
_
+z
2
t

, (10)
where T is the number of observations.
6
3.2 Student-t
For a Student-t distribution, the log-likelihood is
L
T
= ln
_

_
+1
2
_
ln
_

2
_
0.5 ln[ ( 2)]
0.5
T

t=1
_
ln
2
t
+ (1 +) ln
_
1 +
z
2
t
2
__
(11)
where is the degrees of freedom, 2 < and ( . ) is the gamma function. When ,
we have the Normal distribution, so that the lower the fatter the tails.
3.3 Skewed Student-t
Skewness and kurtosis are important in nancial applications in many respects (in asset pricing
models, portfolio selection, option pricing theory or Value-at-Risk among others). Therefore, a
distribution that can model these two moments looks appropriate. Quite recently, Lambert and
Laurent (2000, 2001) extend the Skewed Student density proposed by Fernandez and Steel (1998)
to the GARCH framework. For a Standardized (zero mean and unit variance) Skewed Student,
the log-likelihood is:
L
T
= ln
_

_
+1
2
_
ln
_

2
_
0.5 ln[ ( 2)] + ln
_
2
+
1

_
+ ln(s)
0.5
T

t=1
_
ln
2
t
+ (1 +) ln
_
1 +
szt+m
2

I
t
__ (12)
where is the asymmetry parameter, the degree of freedom of the distribution, (.) the gamma
function, I
t
=
_
_
_
1 if z
t

m
s
1 if z
t
<
m
s
, m =
(
+1
2
)

2
)
_

1

_
and s =
_
_

2
+
1

2
1
_
m
2
. See
Lambert and Laurent (2001) for more details.
Of course, the choice of the distribution has a particular impact on some models, such as the
EGARCH. Indeed, for the normal (Gaussian) density,
E (|z
t
|) =
_
_
2
/

_
and for the Skewed Student-t distribution,
E (|z
t
|) =
2
2
+
1

(
1+
2
)2

(2)

(1)(

2
)
.
Note that for the symmetric Student-t, = 1.
4 Empirical Application
4.1 Data and Methodology
In this section, we describe the data and our methodology. Data consist in 3935 daily observations
of the FTSE 100 index (London) and the DAX 30 index (Frankfurt). It covers a 15 years period,
7
Table 1: Descriptive Statistics
Mean Min. Max. St.Dev. Skewness Kurtosis J.-Bera ARCH(2)
FTSE 0.0388 -13.029 7.5970 0.9830 -1.6982 29.377 85166 864.763
DAX 0.0396 -13.710 7.2875 1.3065 -0.9476 16.276 21656 86.509
J.-Bera is the Jarque and Bera (1987) test for normality, ARCH(2) refers to the Engle (1982) LM test for presence of
ARCH at lag 2.
from 01/02/1986 to 12/29/2000
7
. The estimation process is run using 11 years of data (1986-1996)
while the remaining 4 years are used for forecasting.
The indices prices are transformed into their returns so that we obtain stationary series. The
transformation is
r
t
= 100 [ln(y
t
) ln(y
t1
)]
Table 1 presents some key statistics of the raw data. Skewness and excess kurtosis are clearly
observed, leading to a high valued Jarque and Bera (1987) test which indicates non-normality of
the distribution. Moreover, Engle (1982) LM test indicates the presence of ARCH processes in
the conditional variance.
To estimate and forecast these indices, we use G@RCH 2.0 of Laurent and Peters (2001),
a package dedicated to the estimation and the forecasting of GARCH models and many of its
extensions. It is written in the Ox programming language (see Doornik, 1999), it provides a nice
dialog-oriented interface and oers a lot of features that are not available in traditional econometric
softwares.
8
Non business day eect is included in the mean as well as an AR(1) process (as suggested
by a preliminary study). Parameters are estimated using the QML technique of Bollerslev and
Wooldridge (1992)
9
and the optimization algorithm used is the Broyden, Fletcher, Goldfarb and
Shanno (BFGS) quasi-Newton method.
10
8
Table 2: APARCH(1,1) estimation results
Mean: y
t
= +
1
DAY
t
+
1
y
t1
+
t
.
Variance:

t
=
1
+
1
(|
t1
|
1

t1
)

+
1

t1
FTSE 100 DAX 30
Normal Student-t Skewed-t Normal Student-t Skewed-t
0.0729 0.0730 0.0662 0.0537 0.0557 0.0526
(0.0176) (0.0163) (0.0163) (0.0201) (0.0182) (0.0182)

1
-0.1524 -0.1154 -0.1167 -0.1318 -0.0518 -0.0508
(0.0208) (0.0354) (0.0354) (0.0557) (0.0385) (0.0448)

1
0.0718 0.0546 0.0549 0.0539 0.0180 0.0180
(0.0209) (0.0194) (0.0195) (0.0260) (0.0191) (0.0192)

1
0.0320 0.0248 0.0243 0.0923 0.0239 0.0239
(0.0167) (0.0094) (0.0088) (0.0804) (0.0085) (0.0084)

1
0.0803 0.0614 0.0615 0.0913 0.0799 0.0796
(0.0286) (0.0132) (0.0129) (0.0425) (0.0146) (0.0146)

1
0.8871 0.9063 0.9068 0.8215 0.9128 0.9131
(0.0373) (0.0255) (0.0242) (0.1123) (0.0179) (0.0179)

1
0.2915 0.1597 0.1375 0.4371 0.3154 0.3159
(0.1726) (0.0723) (0.0711) (0.1181) (0.0837) (0.0839)
1.6175 1.7742 1.7952 2.0782 1.3431 1.3469
(0.3537) (0.2991) (0.2913) (0.6938) (0.1521) (0.1523)
10.0564 10.2516 6.3329 6.3652
(2.3432) (2.4042) (0.9076) (0.9094)
-0.0686 -0.0143
(0.0307) (0.0251)
S.C 0.9613 0.9634 0.9542 0.9356 0.9774 0.9754
Asymptotic heteroskedasticity-consistent standard errors are given in parentheses. S.C. is the stationary constraint value.
9
Table 3: Estimation Statistics - Models Comparison (Student-t Disrtibution)
FTSE 100 DAX30
GARCH EGARCH GJR APARCH GARCH GJR APARCH
Q(20) 14.551 13.876 13.957 14.169 19.970 20.251 19.757
Q
2
(20) 14.909 25.705 11.703 17.558 2.497 2.792 2.908
P(50) 77.05 66.51 66.37 63.18 114.53 129.62 129.41
(0.006) (0.049) (0.050) (0.084) (0.000) (0.000) (0.000)
[0.000] [0.005] [0.007] [0.011] [0.000] [0.000] [0.000]
AIC 2.3808 2.3820 2.3797 2.3802 2.8519 2.8484 2.8446
Log-Lik -3433.3 -3432.9 -3430.7 -3430.3 -4084.07 -4078.08 -4071.6
Q(20) and Q
2
(20) are respectively the Box-Pierce statistic at lag 20 of the standardized and squared standardized residuals.
P(50) are the Pearson Goodness-of-t with 50 cells. P-values of the non adjusted and adjusted test are given respectively
in parentheses and in brackets. AIC and Log-Lik are the Akaike Information criterion and Log-Likelihood value.
4.2 Estimation
Table 2 presents the estimation results for the parameters for the APARCH model
11
while Tables
3 and 4 reports some useful in-sample statistics.
12
Several conclusions can be drawn when analyzing these results:
In the DAX 30 case, the convergence could not be reached with the EGARCH model,
whatever the distribution. We will therefore focus on the other three models for this series.
The use of asymmetric GARCH models seem to be justied. All asymmetric coecients
are signicant at standard levels. Moreover, the Akaike information criteria (henceforward
AIC) and the log-likelihood values highlight the fact that GJR or APARCH models better
estimate the series than the traditional GARCH.
7
All the data were supplied by Datastream.
8
The available models are ARCH, GARCH, EGARCH, GJR, APARCH, IGARCH (Engle and Bollerslev, 1986),
FIGARCH (Baillie, Bollerslev, and Mikkelsen, 1996 and Chung, 1999), FIEGARCH (Bollerslev and Mikkelsen,
1996) and FIAPARCH (Tse, 1998). These models can be estimated by Approximate (Quasi-) Maximum Likelihood
under four assumptions: Normal, Student-t, GED or skewed Student-t errors. G@RCH 2.0 can be downloaded free
of charge for academic purposes at http://www.egss.ulg.ac.be/garch/.
9
Note that it is quite evident from equation 4 (and all the following equations of Section 2) that the recursive
evaluation of this function is conditional on unobserved values. The ML estimation is therefore not perfectly exact.
To solve the problem of unobserved values, G@RCH 2.0 set these quantities to their unconditional expected values.
10
See Doornik (1999), p.240-241, for further details.
11
The results for the other models being quite similar, they are not reported. Interested reader can obtain them
on simple request.
12
idem
10
Table 4: Estimation Statistics - Distributions Comparison (APARCH Model)
FTSE 100 DAX30
Normal Student-t Skewed-t Normal Student-t Skewed-t
Q(20) 11.317 14.169 14.283 21.26 19.757 19.776
Q
2
(20) 12.595 17.558 17.387 2.997 2.908 2.910
P(50) 66.99 63.18 59.31 121.21 129.41 128.89
(0.045) (0.084) (0.149) (0.000) (0.000) (0.000)
[0.006] [0.011] [0.020] [0.000] [0.000] [0.000]
AIC 2.4440 2.3802 2.3789 2.9754 2.8446 2.8452
Log-Lik -3523.7 -3430.3 -3427.5 -4260.24 -4071.6 -4071.4
Q(20) and Q
2
(20) are respectively the Box-Pierce statistic at lag 20 of the standardized and squared standardized residuals.
P(50) is the Pearson Goodness-of-t with 50 cells. P-values of the non adjusted and adjusted test are given respectively
in parentheses and in brackets. AIC and Log-Lik are the Akaike Information criterion and Log-Likelihood value.
Regarding the densities, the two Student-t distributions clearly outperform the Gaussian.
Indeed, the log-likelihood function strongly increases when using the (skewed) Student-t,
leading to AIC criteria of 2.44 and 2.98 with the Gaussian versus 2.38 and 2.84 with the non
normal densities, for the FTSE and the DAX respectively. The usefulness of asymmetry in
the density is less obvious: if the Skewed Student-t gives better results than the symmetric
Student-t when modelling the FTSE, the opposite result is observed with the DAX. A
possible explanation is that, if skewness is signicant in both series, its magnitude is quite
inferior in the DAX series. The addition of two asymmetric parameters (asymmetric GARCH
+ asymmetric distribution) may therefore be unnecessary.
All the models seem to do a good job in describing the dynamic of the rst two moments of
the series as shown by the Box-Pierce statistics for the residuals and the squared residuals
which are all non-signicant at 5% level.
The stationary constraints are observed for every model and for every density. In particular,
Table 4.2 reports the stationary condition of the APARCH model. The values (ranging from
0.936 to 0.975) suggest long persistence of the volatility of the indices series.
4.3 Forecasts
The forecasting ability of GARCH models have often been questioned in the past (see, Poon and
Granger, 2001, for an interesting discussion on this topic). But, as pointed out in Andersen and
Bollerslev (1997), considering the squared daily returns as the true volatility (which has been
11
the case for a long time) may not be a proper measure. They propose an alternative measure of
this realized volatility that can be expressed as:

2
t
=
K

k=1
r
2
(k),t
, (13)
where r
(k),t
is the return of the k
th
intra-day interval of the t
th
day and K is the number of
intervals per day. In our study, we will aggregate 10.00, 12.00, 14.00 and 16.00 CET index returns
to compute the realized volatility (i.e., in our case, K = 4).
To assess the performance of the dierent models in forecasting the conditional variance, we
compute 6 measures:
1. Mean Squared Errors (MSE)
2. Median Squared Error (MedSE)
3. Mean Absolute Error (MAE)
4. Adjusted Mean Absolute Percentage Error (AMAPE)
5. Theil Inequality Coecient (TIC)
6. Mincer-Zarnowitz R
2
(R2)
The rst three criteria are well-known and self-explanatory but the last three may require
additional explanations. The AMAPE is
AMAPE =
1
h+1
S+h

t=S

2
t

2
t

2
t
+
2
t

.
where h is the number of steps ahead, S the sample size,
2
the forecasted variance and
2
the
actual variance.
The Theil inequality coecient is a scale invariant measure that always lies between zero and
one, where zero indicates a perfect t. It is given by
TIC =

1
h+1
S+h

t=S
( y
t
y
t
)
2

1
h+1
S+h

t=S
y
2
t
+

1
h+1
S+h

t=S
y
2
t
.
Historically, the Mincer-Zarnowitz regression (Mincer and Zarnowitz, 1969) has been largely
used to evaluate forecasts in the conditional mean. For the conditional variance, it is computed
by regressing the forecasted variances on the actual (or true) variances

2
t
= +
2
t
+
t
(14)
12
Table 5: Forecasts Performance - Models Comparison
FTSE 100 DAX 30
Normal
GA EG GJR AP GA EG GJR AP
MSE 4 3 2 1 MSE 3 - 2 1
MedSE 4 1 3 2 MedSE 3 - 2 1
MAE 4 1 3 2 MAE 3 - 1 2
AMAPE 4 3 2 1 AMAPE 3 - 1 1
TIC 3 4 2 1 TIC 3 - 1 3
R2 4 1 3 2 R2 3 - 2 1
Total 23 13 15 9 Total 18 - 9 9
Student-t
GA EG GJR AP GA EG GJR AP
MSE 4 3 2 1 MSE 3 - 1 2
MedSE 4 1 3 2 MedSE 3 - 1 2
MAE 4 3 2 1 MAE 3 - 1 2
AMAPE 4 3 2 1 AMAPE 2 - 1 3
TIC 3 4 2 1 TIC 3 - 1 2
R2 4 2 1 3 R2 3 - 1 2
Total 23 16 12 9 Total 17 - 6 13
Skewed Student-t
GA EG GJR AP GA EG GJR AP
MSE 4 3 2 1 MSE 3 - 1 2
MedSE 4 2 3 1 MedSE 3 - 1 2
MAE 4 3 2 1 MAE 3 - 1 2
AMAPE 4 3 2 1 AMAPE 2 - 1 3
TIC 3 4 2 1 TIC 3 - 1 2
R2 4 1 2 3 R2 3 - 1 2
Total 23 16 13 8 Total 17 - 6 13
GA denotes the linear GARCH(1,1) model in 4, EG the EGARCH(1,1) in 6, GJR, the GJR(1,1) model in 8 and AP the
APARCH(1,1) model in 9. MSE is Mean Squared Errors, MedSE is Median Squared Errors, MAE is the Mean Absolute
Error, AMAPE is the Adjusted Mean Absolute Percentage Error, TIC is the Theil Inequality Coecient and R2 is the R
2
of Equation 14.
13
Table 6: Forecasts Performance - Distributions Comparison
FTSE 100
GARCH EGARCH
Normal Student Sk.Student Normal Student Sk.Student
MSE 1 3 2 MSE 1 3 2
MedSE 3 1 2 MedSE 3 1 2
MAE 3 1 2 MAE 3 1 2
AMAPE 3 1 2 AMAPE 3 1 2
TIC 1 3 2 TIC 3 1 2
R2 1 2 3 R2 3 2 1
Total 12 11 13 Total 16 9 11
GJR APARCH
Normal Student Sk.Student Normal Student Sk.Student
MSE 1 2 3 MSE 1 2 3
MedSE 3 1 2 MedSE 3 2 1
MAE 3 1 2 MAE 3 1 2
AMAPE 3 1 2 AMAPE 3 1 2
TIC 1 3 2 TIC 3 1 2
R2 1 2 3 R2 3 2 1
Total 12 10 14 Total 16 9 11
MSE is Mean Squared Errors, MedSE is Median Squared Errors, MAE is the Mean Absolute Error, AMAPE is the Adjusted
Mean Absolute Percentage Error, TIC is the Theil Inequality Coecient and R2 is the R
2
of Equation 14.
14
The R
2
statistic from this regression therefore provides the proportion of variances explained by
the forecast (i.e., the higher the R
2
, the better the forecasts).
Forecasting ability is reported by ranking the dierent models. Table 5 compares the models
based on the GARCH specications for both series while Table 6 shows the comparison between
distributions for the FTSE.
13
Some comments can be made on these results:
The comparison between models strongly supports the use of asymmetric GARCH models.
Among these three models, APARCH outperforms GJR for the FTSE while the opposite
is true for the DAX index. EGARCH provides less satisfactory results while symmetric
GARCH clearly gives the poorest forecasts.
The comparison between densities is harder because results are dierent from one model to
another. However, the Student-t looks overall the most succesful in forecasting the FTSE
conditional variance. As for the DAX (not reported here), the results are conicting and
do not allow to draw a general conclusion. Thus the skewed Student-t seems to be more
appropriate to forecast series showing higher skewness. For instance, Lambert and Laurent
(2001) nd that the skewed Student-t density is more appropriate in modelling the NASDAQ
index than symmetric densities.
In particular, the R
2
is higher when using asymmetric GARCH. For instance, when using
a Student-t distribution, it ranges from 0.104 to 0.122 with the asymmetric GARCH versus
0.097 with the symmetric GARCH for the FTSE and it goes from 0.136 to 0.161 versus 0.116
with the symmetric GARCH for the DAX.
14
This nding denotes an improvement compared
to previous studies using squared daily returns as the true volatility. For instance, Jorion
(1996) reports a R
2
of 0.024 when studying daily DEM-USD returns while Andersen and
Bollerslev (1997) nd 0.047 for the same series, but with a dierent period range. Similar
results are reported in Schwert (1990), Day and Lewis (1992) or West and Cho (1995). This
increase in the value of R
2
is due to the aggregation of intradaily squared returns instead of
daily squared returns. Our ndings could certainly be improved if shorter intervals were used:
studying the DEM-USD and the JPY-USD exchange rates and using 5-minutes intervals to
compute the realized volatility, Andersen and Bollerslev (1997) nd R
2
of 0.479 and 0.392
15
while Blair, Poon, and Taylor (2000) obtain a R
2
of 0.423 when forecasting the S&P 100
index with a GJR model.
13
The results for the DAX is not reported for size purpose but is available on request.
14
These results are not reported here to save place, but they are available on request)
15
Note that when xing K to 3 in equation 13, Andersen and Bollerslev (1997) nd R
2
of 0.133 and 0.095 for the
DEM-USD and the JPY-USD, respectively, which is similar to our ndings with K = 4
15
5 Conclusion
In this paper we compared the forecasting performance of several GARCH-type models. The com-
parison was focused on two dierent aspects: the dierence between symmetric and asymmetric
GARCH (i.e., GARCH versus EGARCH, GJR and APARCH) and the dierence between normal-
tailed symmetric, fat-tailed symmetric and fat-tailed asymmetric distributions (i.e. Normal versus
Student-t and Skewed Student-t).
Our results shows that noticeable improvements can be made when using an asymmetric
GARCH in the conditional variance (and, among the tested models, APARCH and GJR seem
to outperform EGARCH). Moreover, non-normal distributions provide better in-sample results
than the Gaussian distribution. Out-of-sample results show however less evidence of superior
forecasting ability.
Using asymmetric GARCH models when estimating and forecasting high frequency nacial
time series can improve the results. Adding non-normal densities is a promising area, as long
as used with clearly non-normal series. Moreover, several directions (not included in this study)
could be explored to improve the forecasts of the volatility of nancial time series. First, true
volatility could be better estimated by selecting shorter time intervals (for instance, 5-minutes
intervals). Second, introducing long run persistence of shocks in the volatility with fractionally
integrated models (FIGARCH, FIEGARCH, FIAPARCH ...) would certainly allow to better catch
the dynamic of the series.
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