GARCH Instruction

GARCH s t a r t end l i s t of series

# list of explanatory variables for mean equation in Resression format
# extra explanatory variables for variance equation in Resression format

Estimates univariate and multivariate ARCH and GARCH models.

Wizard
You can use the ARCH/GARCH Wizard on the Statistics menu t o estimate a variety of
ARCH and GARCH models (the Wizard does not support all of the options available on
the GARCH instruction).

Parameters
start, end range for estimation

list list of one or more dependent variables

Defaults
start, end maximum range possible given variables

ARCH/GARCH Options-Apply to All Models

p=number o f GARCH (lagged variance) terms [0]
q=number o f ARCH (lagged residual squared terms o r analogous) [O]
These specify the order of the GARCH(P,~)
or ARCH(^) model.

distrib=[normal]/t/ged
shapeparm=input value for shape parameter for t o r GED [estimated]
The assumed distribution of the error process, Normal, t (Student) or Generalized
Error Distribution. GED is only available for univariate models. I f using T or GED,
you can use SHAPEPARM to provide your own value for the shape parameter. I f you
don't, it will be estimated.

asymmetric/[noasymmetric]
Includes an asymmetry term. For a standard GARCH model, this will give you the GIR
(Glosten, Jagannathan, Runkle (1993)) model.

mean/nomean [default is MEAN unless you use REGRESSORS]

MEAN includes a constant term in the mean equation(s). Use NOMEAN if you don't
want any mean terms at all. To supply your own mean equation(s), use
REGRESSORS or EQUATION for univariate models, or MODEL for multivariate
models.

xregressors/[noxregressors]
Use this if you want some exogenous shift variables in the variance equation. I f you
use it, include them on a supplementary card. I f you are also using the
REGRESSORS option, the XREGRESSORS are on a second card.

presample=SYMMETRIC matrix o f pre-sample values

Use this t o supply pre-sample values for the lagged variances and lagged squared
residuals. For a univariate model, you can do PRESAMPLE=value.
 I f CONDITION, GARCH conditions on the required lagged residuals rather than
assigning them the presample values.

i = n o d r i f t / d r i f t [ n o t used]
The Ioption does an IGARCH model, where the "GARCH" coefficients (all a's and
b's) sum t o one (for multivariate, each component is constrained separately). With
I=NODRIFT, the constant term in the variance is constrained to zero. with I=DRIR,
those constant terms are estimated. This cannot be used with MV=BEKK or
MV=VECH.

derives=VECTOR[SERIES] for partial derivatives [unused]

This stores the series of partial derivatives of the log likelihood. The first series in the
VECTOR will be the partials with respect t o the first parameter displayed in the GARCH
output, the second series will be the partials with respect to the second parameter,
and so on.

ARCH/GARCH Options-Univariate Models Only

regressors/[noregressors]
equat ion=equation form to use for the mean
By default, the mean equation for the dependent variable is just a single parameter
for a time-invariant mean. I f you want any other mean equation, use the
REGRESSORS option, and include all the regressors (including the CONSTANT if
needed) on a supplementary card. As an alternative t o REGRESSORS, you can use
the EQUATION option t o provide an equation that you've already defined.

h s e r i e s =SERIES
of estimated variances (univariate)
resids=SERIES of (non-standardized) residuals (univariate)
I f estimating a univariate model, you can use the HSERIES and RESIDS options to
save the estimated variances and residuals, respectively, into SERIES.

exponential/[noexponential]
Use EXPONENTIAL if you want to do the E-GARCH model of Nelson (1991) or a
generalization of it.

ARCH/GARCH Options-Multivariate Models Only

mv=[standard]/bekk/diagonal/cc/dcc/ewma
Chooses the form for a multivariate GARCH model. The default is the standard
multivariate GARCH model. BEKK gives the 'BEKK" formulation (also known as BEK or
EK, which imposes positive-definiteness on the covariance matrix. The other choices
are all restricted correlation models. DIAGONAL estimates separate univariate GARCH
models for each dependent variable, so that covariances are restricted to zero. CC
gives the Constant Correlation model, DCC implements the Dynamic Conditional
Correlations model, and EWMA implements an exponentially weighted moving
average model. See Section 12.1 in the User's Guide for details.

model=MODEL (of linear equations) for the mean equations

Use MODEL if you want t o supply your own mean equations. Otherwise, the
MEANINOMEAN option determines the form of the mean equation.

variances=simple/varma/exponential
VARIANCES allows you t o select the form of the variance terms (for diagonal, CC, and
DCC models).
 hmatrices=SERIES[SYMM] estimated covariance matrices (multivariate)
mvhseries=SYMM[SERIES] estimated covariance series (multivariate)
r v e c t o r s =SERIES[VECT] of non-standardized residuals (multivariate)
I f estimating a multivariate model, you can use HMATRICES t o save the estimated
covariance arrays as a SERIES of SYMMETRIC arrays, or use MVHSERIES t o store
them as a SYMMETRIC array of SERIES. Use RVECTORS t o save the
(non-standardized) residuals to a SERIES of VECTORS.

General Options
Standard Reqression Options
Robust Error Options
Standard Non-Linear Estimation Options

method=bhhh/[bfgs]/simplex/genetic/evaluate
pmethod=bhhh/bfgs/simplex/genetic/evaluate
piters=number of PMETHOD iterations to perform [none]
BHHH is Berndt, Hall, Hall and Hausman; BFGS is Broyden, Fletcher, Goldfarb and
Shanno; SIMPLEX is the simplex algorithm; and GENETIC is a genetic search
algorithm.

With METHOD=EVALUATE, RATS simply evaluates the model given the initial
parameter values, without trying to estimate new coefficient values.

Use PMETHOD and PITERS if you want to use a preliminary estimation method to
refine your initial parameter values before switching t o one of the other estimation
methods. For example, t o do 20 simplex iterations before switching t o BFGS, use
PMETHOD=SIMPLEX, PITERS=20, and METHOD=BFGS.

i n i t i a l = VECTOR o f initial guess values for the parameters

INITIAL can be used to feed in initial guess values for estimation, or can be used
with METHOD=EVALUATE, for evaluating the likelihood a t specific values.

Variables
%BETA coefficient vector (VECTOR)
%CONVERGED =1 or 0. 1 indicates that the process converged.
%CVCRIT final convergence criterion (REAL). This will be equal to zero if the sub-
iteration limit was reached on the last iteration.
% FUNCVAL final value of the function being maximized. (REAL)
% ITERS iterations completed (INTEGER)
%LOGL log likelihood value (REAL)
%NOBS number of observations (INTEGER)
%NREG number of regressors (INTEGER)
% NVAR number of variables (INTEGER)
%RESIDS series containing the residuals (univariate) (REAL)
%STDERRS vector of coefficient standard errors (VECTOR)
%TSTATS vector of t-statistics of the coefficients (VECTOR)
% XX (X 'X) inverse matrix (SYMMETRIC)

Example
garch(p=O,q=2,regressors,presarnple=l l % s eI ) / f f e d
# constant f f e d ( l 1
ARCHIGARCH Wizard
The ARCHIGARCH Wizard on the Statistics menu estimates univariate and multivariate
ARCH and GARCH models. The Wizard will generate the appropriate GARCH instruction
based on the information you enter. Note that the GARCH command offers several
additional options not available via the Wizard, such as options for including additional
regressors, saving estimated covariance matrices, controlling the non-linear estimation
method, and so on.

Selecting the Wizard brings up the following dialog box:

/ Drp?ndent Vanablr[s) A Lagged uX"2 Tern18 I1 I- Asy~iinietncEfiects

Lagged Varimce Tern% [r Distribution F A

Model Type ]simple v

-1

Sample Start and End Residuals To r--4

I ---1

(Leave Blank for Full Range)

A -4
A I A ~ a r n TO
n ~ ~ [I/

r Robust (HAC) Standard Errors F Shocr Standard Outpilt

LagslEiand\u~dth r r Sho!;~ VC\I of Coefficients
Lag Wndow T y ~ e I -

cancel I
To estimate a model, select one or more dependent variables using the "Dependent
Variable(s)" field, set any of the other options as desired, and then click on OK. RATS will
generate the appropriate GARCH command. RATS will automatically execute the command
if the "Paste AND Execute" switch is turned on.

All of the fields are described below--note that some fields are only displayed for certain
choices of "Method".

Dependent Variable(s)
Use this field to enter or select the dependent variable(s) for your model. You can
either type in a list of variables, separating each with a t least one blank space, or
click on the series list button --Ato select from a list of the series available in
 memory via a Select Variables dialoq box.

Lagged U**2, Lagged Variance Terms

Use these fields to specify the order of the ARCH(q) or GARCH(p,q) model, by
entering the number of lags of the squared residuals (Q) and variances (P).

I-GARCH
For certain models, you can use this field to select an I-GARCH model with or without
drift.

Model Type
For univariate models, you can choose simple ARCHIGARCH, or exponential with or
without asymmetric effects. For multivariate models, select from simple (diagonal
VECH), BEKK, VECH, Diagonal, CC (Constant Correlation), DCC (Dynamic
Conditional), or EWMA.

Univariate Models
For multivariate models, if you select Diagonal, CC, DCC, or EWMA in the Model Type
field, RATS will display the Univariate Models field, which you can use to select the
form of the individual univariate models in the system. You can choose from Simple,
VARMA, or Exponential models (the same model is applied for all variables in the
system).

Asymmetric Effects
Turn this checkbox on t o select asymmetric effects for multivariate models (use the
Model Type field t o select asymmetric effects for univariate models).

Distribution
Choose the distribution for the model. The choices are Normal, Student t, and GED.

Sample Start and End

Use these fields t o set a specific starting and/or ending date for the estimation.

Residuals to, Variances to

You can use this field to store, respectively, the estimated residuals and variances.

Robust (HAC) Standard Errors, Lags/Bandwidth, Lag Window Type

These correspond t o the ROBUSTERRORS, LAGS, and LWINDOW options. See LINREG and
Robust E r r o r Calculations for details.

Show Standard Output

Turn this off if you want t o suppress the output from the regression (this adds a
NOPRINT option to the estimation instruction).

Show VCV of Coefficients

Displays the estimated variance/covariance matrix (adds a vcv option).