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  • Estimate GARCH Model from Time Series


    I am a student and new to Stata. For a university course I have to model a GARCH model from time series data (euro-dollar exchange rate by the ECB).

    I am not allowed to use the built-in modeling procedure but should do the procedure on my own step-by-step.

    1. I load the data.
    tsset newdate

    2. I generate the first difference of the exchange rate.
    gen Dvalue = value - L.value

    3. I estimate the mean equation as an AR(1) process.
    reg Dvalue L.Dvalue

    4. I predict the residuals and square them.
    predict Dresid, resid
    gen Dresid_sq = Dresid^2

    5. Now I run a regression of the squared residuals on its lag as a first step to get to the GARCH model.
    reg Dresid_sq L.Dresid_sq

    6. From this I want to compute the conditional variance of the time series
    gen hsq = _b[_cons] + _b[L1.Dresid_sq]*L.Dresid_sq

    7. Now, I want to estimate the GARCH(1,1) model.
    reg hsq L.hsq L.Dresid_sq

    Unfortunately, I get only coefficients no standard errors or p-values.

    Would it be an option to do step 7 as a Maximum Likelihood Estimation? How would this be done?

    Any help is appreciated. Thanks.

  • #2
    I want to put my question in a different form. Starting from a time series (euro-dollar exchange rate), how can I compute the conditional variance?