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Joined: Fri May 31, 2013 8:46 am


Postby jan@crestatrading.se » Mon Jun 03, 2013 8:40 am

Hi Carol,
First, thanks for a beautiful set of books!
I have a qustion about the EWMA model (II.3.37). You reason that this is a restricted GARCH, which turns out to be trivial.
I can't follow the argument. I think you conclude that (II.4.5) are necessary consitions for GARCH to have a "steady state" variance, whatever that means.
But why can't (II.3.37) exist as a proper model in its own right without having a steady state variance?
Best regards,

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Postby coalexander » Mon Jun 03, 2013 3:08 pm

Hi Jan

I think I actually make the case that there are two way to view EWMA

(a) as an estimator for unconditional variance, just a different (weighted, more complex) formula to the usual sample variance

(b) as a conditional model, in which case it is like a baby GARCH model. A conditional variance model need not have a long-term steady state, like the I-GARCH model.

Hope this helps, Carol

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