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# Documentation

## Optimization Settings for Conditional Variance Model Estimation

### Optimization Options

estimate maximizes the loglikelihood function using fmincon from Optimization Toolbox™. fmincon has many optimization options, such as choice of optimization algorithm and constraint violation tolerance. Choose optimization options using optimoptions.

estimate uses the fmincon optimization options by default, with these exceptions. For details, see fmincon and optimoptions in Optimization Toolbox.

optimoptions PropertiesDescriptionestimate Settings
AlgorithmAlgorithm for minimizing the negative loglikelihood function'sqp'
DisplayLevel of display for optimization progress'off'
DiagnosticsDisplay for diagnostic information about the function to be minimized'off'
TolConTermination tolerance on constraint violations1e-7

If you want to use optimization options that differ from the default, then set your own using optimoptions.

For example, suppose that you want estimate to display optimization diagnostics. The best practice is to set the name-value pair argument 'Display','diagnostics' in estimate. Alternatively, you can direct the optimizer to display optimization diagnostics.

Define a GARCH(1,1) model (Mdl) and simulate data from it.

```Mdl = garch('ARCH',0.2,'GARCH',0.5,'Constant',0.5);
rng(1);
y = simulate(Mdl,500);
```

Mdl does not have a regression component. By default, fmincon does not display the optimization diagnostics. Use optimoptions to set it to display the optimization diagnostics, and set the other fmincon properties to the default settings of estimate listed in the previous table.

```options = optimoptions(@fmincon,'Diagnostics','on','Algorithm',...
'sqp','Display','off','TolCon',1e-7)
% @fmincon is the function handle for fmincon
```
```options =

fmincon options:

Options used by current Algorithm ('sqp'):
(Other available algorithms: 'active-set', 'interior-point', 'trust-region-reflective')

Set by user:
Algorithm: 'sqp'
Diagnostics: 'on'
Display: 'off'
TolCon: 1.0000e-07

Default:
DerivativeCheck: 'off'
DiffMaxChange: Inf
DiffMinChange: 0
FinDiffRelStep: 'sqrt(eps)'
FinDiffType: 'forward'
FunValCheck: 'off'
MaxFunEvals: '100*numberOfVariables'
MaxIter: 400
ObjectiveLimit: -1.0000e+20
OutputFcn: []
PlotFcns: []
ScaleProblem: 'none'
TolFun: 1.0000e-06
TolX: 1.0000e-06
TypicalX: 'ones(numberOfVariables,1)'
UseParallel: 0

Options not used by current Algorithm ('sqp')
Default:
AlwaysHonorConstraints: 'bounds'
HessFcn: []
HessMult: []
HessPattern: 'sparse(ones(numberOfVariables))'
Hessian: 'not applicable'
InitBarrierParam: 0.1000
MaxPCGIter: 'max(1,floor(numberOfVariables/2))'
MaxProjCGIter: '2*(numberOfVariables-numberOfEqualities)'
MaxSQPIter: '10*max(numberOfVariables,numberOfInequalities...'
PrecondBandWidth: 0
RelLineSrchBnd: []
RelLineSrchBndDuration: 1
SubproblemAlgorithm: 'ldl-factorization'
TolConSQP: 1.0000e-06
TolPCG: 0.1000
TolProjCG: 0.0100
TolProjCGAbs: 1.0000e-10

```

The options that you set appear under the Set by user: heading. The properties under the Default: heading are other options that you can set.

Fit Mdl to y using the new optimization options.

```ToEstMdl = garch(1,1);
EstMdl = estimate(ToEstMdl,y,'Options',options);
```
```____________________________________________________________
Diagnostic Information

Number of variables: 3

Functions
Objective:                            @(X)Mdl.nLogLikeGaussian(X,V,E,Lags,1,maxPQ,T,nan,trapValue)
Hessian:                              finite-differencing (or Quasi-Newton)

Constraints
Nonlinear constraints:                do not exist

Number of linear inequality constraints:    1
Number of linear equality constraints:      0
Number of lower bound constraints:          3
Number of upper bound constraints:          3

Algorithm selected

____________________________________________________________
End diagnostic information

GARCH(1,1) Conditional Variance Model:
----------------------------------------
Conditional Probability Distribution: Gaussian

Standard          t
Parameter       Value          Error       Statistic
-----------   -----------   ------------   -----------
Constant       0.431451      0.465646       0.926565
GARCH{1}       0.314346      0.249922        1.25778
ARCH{1}       0.571428      0.326773         1.7487
```
 Note:   estimate numerically maximizes the loglikelihood function potentially using equality, inequality, and lower and upper bound constraints. If you set Algorithm to anything other than sqp, then check that the algorithm supports similar constraints, such as interior-point. For example, fmincon sets Algorithm to trust-region-reflective by default. trust-region-reflective does not support inequality constraints. Therefore, if you do not change the default Algorithm property value of fmincon, then estimate displays a warning. During estimation, fmincon temporarily sets Algorithm to active-set by default to satisfy the constraints.estimate sets a constraint level of TolCon so constraints are not violated. Be aware that an estimate with an active constraint has unreliable standard errors since variance-covariance estimation assumes the likelihood function is locally quadratic around the maximum likelihood estimate.

### Conditional Variance Model Constraints

The software enforces these constraints while estimating a GARCH model:

• Covariance-stationarity,

${\sum }_{i=1}^{P}{\gamma }_{i}+{\sum }_{j=1}^{Q}{\alpha }_{j}<1$

• Positivity of GARCH and ARCH coefficients

• Model constant strictly greater than zero

• For a t innovation distribution, degrees of freedom strictly greater than two

For GJR models, the constraints enforced during estimation are:

• Covariance-stationarity constraint,

${\sum }_{i=1}^{P}{\gamma }_{i}+{\sum }_{j=1}^{Q}{\alpha }_{j}+\frac{1}{2}{\sum }_{j=1}^{Q}{\xi }_{j}<1$

• Positivity constraints on the GARCH and ARCH coefficients

• Positivity on the sum of ARCH and leverage coefficients,

${\alpha }_{j}+{\xi }_{j}\ge 0,\text{\hspace{0.17em}}\text{\hspace{0.17em}}\text{\hspace{0.17em}}j=1,\dots ,Q$

• Model constant strictly greater than zero

• For a t innovation distribution, degrees of freedom strictly greater than two

For EGARCH models, the constraints enforced during estimation are:

• Stability of the GARCH coefficient polynomial

• For a t innovation distribution, degrees of freedom strictly greater than two