GRG Non-Linear and ARWM Methods for Estimating the GARCH-M, GJR, and log-GARCH Models

Didit Budi Nugroho; Lam Peter Panjaitan; Dini Kurniawati; Zaini Kholil; Bambang Susanto; Leopoldus Ricky Sasongko

doi:10.31764/jtam.v6i2.7694

GRG Non-Linear and ARWM Methods for Estimating the GARCH-M, GJR, and log-GARCH Models

Didit Budi Nugroho, Lam Peter Panjaitan, Dini Kurniawati, Zaini Kholil, Bambang Susanto, Leopoldus Ricky Sasongko

Abstract

Numerous variants of the basic Generalized Autoregressive Conditional Heteroscedasticity (GARCH) models have been proposed to provide good volatility estimating and forecasting. Most of the study does not work Excel’s Solver to estimate GARCH-type models. The first purpose of this study is to provide the capability analyze of the GRG non-linear method built in Excel’s Solver to estimate the GARCH models in comparison to the adaptive random walk Metropolis method in Matlab by own codes. The second contribution of this study is to evaluate some characteristics and performance of the GARCH-M(1,1), GJR(1,1), and log-GARCH(1,1) models with Normal and Student-t error distributions that fitted to financial data. Empirical analyze is based on the application of models and methods to the DJIA, S&P500, and S&P CNX Nifty stock indices. The first empirical result showed that Excel’s Solver’s Generalized Reduced Gradient (GRG) non-linear method has capability to estimate the econometric models. Second, the GJR(1,1) models provide the best fitting, followed by the GARCH-M(1,1), GARCH(1,1), and log-GARCH(1,1) models. This study concludes that Excel’s Solver’s GRG non-linear can be recommended to the practitioners that do not have enough knowledge in the programming language in order to estimate the econometrics models. It also suggests to incorporate a risk premium in the return equation and an asymmetric effect in the variance equation.

Keywords

ARWM; Excel’s Solver; GARCH; GRG Non-Linear; Student-t;

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DOI: https://doi.org/10.31764/jtam.v6i2.7694