The Generalized Autoregressive Conditional Heteroskedasticity [GARCH] model is often used for forecasting stock market volatility. It is frequently found, however, that estimated residuals from GARCH models have excess kurtosis, even when one allows for conditional t-distributed errors. In this paper we examine if this feature can be due to neglected additive outliers [AOs], where we focus on the out-of-sample forecasting properties of GARCH models for AO-corrected returns. We find that models for AO-corrected data yield substantial improvement over GARCH and GARCH-t models for the original returns, and that this improvement holds for various samples, two forecast evaluation criteria and four stock markets.

Additional Metadata
Keywords GARCH, additive outlier, forecasting volatility
Persistent URL dx.doi.org/10.1016/S0169-2070(98)00053-3, hdl.handle.net/1765/2174
Citation
Franses, Ph.H.B.F., & Ghijsels, H.. (1999). Additive outliers, GARCH and forecasting volatility. International Journal of Forecasting, 1–9. doi:10.1016/S0169-2070(98)00053-3