Correct fmincon() constraints for GARCH?

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Michael Ziedalski
Michael Ziedalski on 14 Feb 2018
Answered: Hang Qian on 16 Feb 2018
Hello, all. So, I am trying to manually to MLE estimate a GARCH(1,1) model using the optimization toolbox's fmincon(). I know that Matlab's built-in garch() has constraints in its optimization, such as briefly mentioned in this mathworks doc, but I do not know how to manually by myself express these by myself as fmincon arguments.
My code so far is this, which works for unconstrained optimization using fminunc/ fminsearch:
lh = @(x,data) -sum(log(fun(x,data))); %Transformation of my input function for optimization.
options = optimset('Display', 'off', 'MaxIter', 1000000, 'TolX', 10^-20, 'TolFun', 10^-20);
[theta, max1] = fmincon(@(x) lh(x,data), guesses, options, constraints???);
The guide for fmincon() is not clearing things up, how I code these constraints myself?

Answers (1)

Hang Qian
Hang Qian on 16 Feb 2018
Hi Michael,
Typically we add some inequality constraints to ensure a positive conditional variance in the GARCH(1,1) model, like constant > 0, arch > 0, garch > 0 and arch + garch < 1.
The numeric optimization function fmincon supports inequality constraints. Since the constraints are linear, we can put them in a matrix form like A * x < b. If the parameters are stacked like [constant, garch, arch], then the constraints can be formulated as
A = [0 1 1]
b = 1
lb = [0 0 0]
Then we can run the constrained optimization using the syntax
fmincon(fun,x0,A,b,[],[],lb,[],[],options)
where the empty matrix [] indicates non-existing constraints of other types.
By the way, we may replace lb by an augmented A and b with more rows, but it is not as efficient as the explicit lower bounds.
Best,
Hang Qian

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