Garch with dummy in mean equation
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Hi, I would like to estimate this regression y=aD1 +aD2 + BD1Ret + BD2Ret +e. D1 is a dummy that is 1 whrn the return is positive, whereas D2 is 1 when it is negative and zero when is positive. I want to use a garch model. Is it correct to put in the garch specification 'C' NaN and to put in the matrix with the dependent variable D1 and D2, i this way it should ignore C and the intercept would become the coefficients of D1 and D2.
I know that i could set the equation as y=a +aD2 + BRet + BD2Ret +e. but I prefer have the two different coefficient and tyhen compute the difference. Thanks in advance Gaia
2 Comments
Walter Roberson
on 11 Aug 2011
Is that the U-shaped piece of logic that you have to get the plumber to come over and clear out if you don't run the garbage collector often enough?
Accepted Answer
the cyclist
on 11 Aug 2011
I don't know the specific answer to your question, but I use a general approach that might be useful to you: Generate data that you know should be perfectly fitted by the model you propose, then see if the technique you want to use gives the correct result.
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More Answers (2)
Oleg Komarov
on 11 Aug 2011
% Fake returns
R = randn(1000,1);
% Intercept dummy
D1 = R > 0;
% Coefficient dummy
D2 = zeros(size(R));
D2(D1) = R(D1);
% GARCH(1,1) with MA(1) for mean + dummies
Spec = garchset('M',1,'P',1,'Q',1,'Display','off');
garchfit(Spec,R,[D1 D2]);
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gaia buratti
on 11 Aug 2011
8 Comments
Oleg Komarov
on 11 Aug 2011
Shouldn't give you problems but don't take my words for granted. I am no expert in ARCH modelling, just know how to implement it with MATLAB.
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