C50. ARCH and GARCH

Topic: Dependence along a series · more questions on this topic
‹ C48

What do ARCH and GARCH models describe? What additional dependence does GARCH include?

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Definitions/notation. ARCH (autoregressive conditional heteroscedasticity) models let the current conditional variance depend on past squared mean-adjusted responses (shocks), describing changing volatility rather than only the conditional mean. GARCH (generalised ARCH) additionally includes lagged conditional variances in that variance equation.