A Comparison of GARCH Type Models With the SV Model on the Financial Markets of BRICS

Abstract

We examine the effectiveness of GARCH models and the SV model in foreign exchange rates and the stock indices of the BRICS. The empirical analysis is conducted using the daily log returns. The data cover the period 13/05/1999-22/11/2018. The theoretical results are confirmed by running the models with the use of R programming language. The conditional variance is modelled with a GARCH (1,1), IGARCH, EGARCH,GJR-GARCH and the Standard Stochastic Volatility model (SV) model. The results suggest that the GJR model outperforms the other GARCH-family models and provides a clear direction on how to critically estimate volatility and infer conclusions. The SV model provides better forecasting results from the standardized GARCH(1,1). The forecasting power of EGARCH performs better, as it indicates lower values in the loss functions After the forecasting tools for evaluation the forecasting results are used. These are the Root Mean Squared Error (RMSE),the Mean Squared Error (MSE) the Mean Absolute Error (MAE). Our findings strongly suggest that more research should be conducted by using different distributions to get more accurate results. Therefore we suggest that the asset returns of sectors and their independent relations, as it would be very helpful for policy practitioners.

Keywords: Stochastic Volatility, GARCH, BRICS

JEL Classification: C5, C13, C53,C55,C58