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RE: st: GARCH estimation time issue


From   "gary tian" <g.tian@uws.edu.au>
To   <statalist@hsphsun2.harvard.edu>
Subject   RE: st: GARCH estimation time issue
Date   Fri, 3 Jun 2005 09:42:08 +1000

Dear Vince and all others,

Thank a lot for your message and explanation, which are very helpful. I
would like to ask one more question. Is there any build-in function to
estimate GARCH or EGARCH with generalised error distribution (GED) or we
have to program by ourself. Eviews has such facility, I would like to
compare the results from these two. But more importantly, Stata is much easy
to use for repeated jobs by LOOP. Thanks in advance.



-----Original Message-----
From: owner-statalist@hsphsun2.harvard.edu
[mailto:owner-statalist@hsphsun2.harvard.edu]On Behalf Of Vince
Wiggins,StataCorp
Sent: Friday, 3 June 2005 1:35 AM
To: statalist@hsphsun2.harvard.edu
Subject: Re: st: GARCH estimation time issue


Gary Tian <g.tian@uws.edu.au> asks why Stata's estimates of a simple
generalized autoregressive conditional heteroskedasticity (GARCH) model
agree
with estimates from Eviews and Shazam while those from a model with
additional
multiplicative heteroskedasticity do not.  Gary asks,

> I estimate GARCH model using intraday data about 30,000 observations
> for 30 individual stocks.
>
> When I use following estimation for one stock, the coefficients are
> same with Eviews and Shazam [...]
>
>      arch r l.r, arch(1) garch(1) nolog
>
> When I add volume in the variance equation to the following estimeation,
>
>      arch r l.r, het(vol) arch(1) garch(1) nolog
>
> The problem is that the values of coefficients from Stata are very
> different from those of Eviews and Shazam but significant levels are
> same.

The option -het(vol)- adds multiplicative heteroskedasticity modeled on the
variable -vol- to the conditional heteroskedasticity specified by the
options
-arch(1)- and -garch(1)-.

There are several reasons why the results might differ.

    1) ARCH/GARCH models have a particularly difficult likelihood to
optimize
       and it is possible that the other packages have stopped at a
different
       point on the likelihood surface.  The likelihood is especially
       difficult when multiplicative heteroskedasticity is included (as it
is
       in Gary's second model).  ARCH models were one of the reasons Stata
       changed its default convergence criterion to the Hessian-scaled
       gradient (HSG) in Stata 8.  Difficult likelihoods, such as those from
       ARCH models, often cause other stopping rules to stop iterating
before
       a maximum has been obtained.  The HSG ensures that a maximum has been
       found, i.e., that the gradient of the likelihood is zero when it
       scaled by the curvature of the likelihood (the Hessian).  As an
ad-hoc
       check, Gary may want to look at the likelihoods and see which is
       larger.

    2) Eviews and Shazam may be using different priming values in computing
       the likelihood.  The likelihood for ARCH models is evaluated
       recursively and requires presample estimates of the conditional
       variance -- priming values.  Stata, by default, uses the
unconditional
       variance as implied by the current coefficient estimates.  I am not
an
       expert on Eviews or Shazam, but my recollection is that Eviews uses
       different priming values.  You can change the priming values in Stata
       using the -arch0()- option; the computations are described in
       "Priming values" in the "Methods and formulas" section of [TS] arch.
I
       believe that Eviews uses a computation that matches the -arch0(xbwt)-
       specification which weights the early observations more heavily in
       computing the priming values.  Asymptotically it does not matter what
       priming values are used, but they can have a potentially large effect
       on the estimates from small or even large samples.

   3)  Eviews and Shazam may be using additive heteroskedasticity rather
than
       multiplicative heteroskedasticity when modeling the additional
variance
       on the variable -vol-.  As documented in the option description for
       -het()-, this option adds multiplicative heteroskedasticity as
modeled
       on the variables specified.  Thus the conditional variance becomes,

            cond_var = exp(a0 + a1*vol) + ARCH/GARCH terms

       Eviews and Shazam may be estimating additive variance terms

            cond_var = c0 + c1*vol + ARCH/GARCH terms

       Multiplicative heteroskedasticity is more numerically stable -- you
do
       not run the risk of adding negative terms to an expression that must
be
       a positive variance.

Gary goes on to ask,

> I check Eviews I use Marquardt optimal algorithm. Ok, so I change to
> following estimation of BFGS algorithm:
>
>     arch r l.r, het(vol) arch(1) garch(1) nolog bfgs
>
> I wait to 45 minutes, it didn't give me results, so I stop it.

I suspect the Broyden, Fletcher, Goldfarb, and Shanno (BFGS) algorithm is
not
converging or that BFGS is simply taking an inefficient path to the
solution.
Nonlinear optimization can be problematic and ARCH likelihoods are
particularly difficult.  That is one reason why Stata offers several
different
optimization methods -- sometimes a likelihood can be more easily optimized
using a different method.  Since convergence was achieved with Stata's
default
optimization method, I would not expect results using BFGS to differ.

As I noted in 1) above, Stata has a very stringent definition of
convergence.
Stata does not stop iterating and declare convergence simply because the
coefficients are not changing or because the likelihood is not changing,
Stata
insists that the multivariate slope of the likelihood -- the gradient- is
zero
as scaled by the Hessian.


-- Vince
   vwiggins@stata.com

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