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How to use GARCH(1,1) model?

Joined
4/5/11
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Does any one have any ideas on how to use GARCH(1,1) to forecast volatility and hedge risk?
For example, we are given 2 years' stock daily prices, how can we use this model?
I just want to gain a deeper understanding on how this model is used in real projects.:rolleyes:
 
Andy, what method is mostly used to estimate volatility in risk measurement (VaR, ES, coherent etc)?
 
I've always been saying I didn't like Jorion's VAR but it would be a good read for you. There is 9th chapter devoted to GARCH models. I'm sure you won't get the explanatory details completely since they are not perfect, but you will get the answer to your question. If needed, notify me and I'll send you that specific chapter (non-copyright) to take a look.

@luzhu
 
  • Take the stock, do first differences.
  • Feed the differences into the GARCH software of your choice.
  • Observe the alpha, beta 1 and beta 2.
  • Estimate the unconditional variance of the time series differences. (This is the sigma squared nought.)
  • Starting with sigma squared nought, use the coefficients just estimated to generate the time series.
I have not seen GARCH used as a forecasting tool for trading ideas. The original Wall Street papers form Salomon Brothers in the 1990's proposed this, but I think the GARCH estimates are too noisy.
 
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