Rolling-sampled parameters of ARCH and Levy-stable models

Abstract

In this paper an asymmetric autoregressive conditional heteroskedasticity (ARCH) model is applied to some well-known financial indices (DAX30, FTSE20, FTSE100 and SP500), using a rolling sample of constant size, in order to investigate whether the values of the estimated parameters of the model change over time. Although, there are changes in the estimated parameters reflecting that structural properties and trading behaviour alter over time, the ARCH model adequately forecasts the one-day-ahead volatility. A simulation study is run to investigate whether the time variant attitude holds in the case of a generated ARCH data process revealing that either in that case the rolling-sampled parameters are time-varying. The rolling analysis is also applied to estimate the parameters of a Levy-stable distribution. The empirical findings support that the stable parameters are also time-variant.