Interview Question: When GARCH Fails

Sample Question #196 (econometrics – time series)

Names some of the weaknesses of the GARCH model.

(Comment: anyone claiming to know time series should know ARCH/GARCH inside out)

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2 Responses to Interview Question: When GARCH Fails

  1. Brett says:

    ANSWER
     
    1) It’s difficult to specify the order of the model
    2) It responds equally to positive and negative shocks
    3) Its tail behavior does not mimic reality
    4) It tends to produce mean-reverting forecasts
     

  2. Brett says:

    Even though GARCH is popular, many hardcore quants who otherwise live by time series dislike it intensely, mainly because they believe it produces inferior, useless forecasts.
     

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