DEFINITION of 'Generalized AutoRegressive Conditional Heteroskedasticity (GARCH)'

A statistical model used by financial institutions to estimate the volatility of stock returns. This information is used by banks to help determine what stocks will potentially provide higher returns, as well as to forecast the returns of current investments to help in the budgeting process.

BREAKING DOWN 'Generalized AutoRegressive Conditional Heteroskedasticity (GARCH)'

There are many variations of GARCH, including NGARCH to include correlation, and IGARCH which restricts the volatility parameter. Each model can be used to accomodate the specific qualities of the stock, industry or economic state.

RELATED TERMS
  1. Generalized AutoRegressive Conditional ...

    An econometric term developed in 1982 by Robert F. Engle, an ...
  2. Heteroskedasticity

    In statistics, when the standard deviations of a variable, monitored ...
  3. Autoregressive

    A stochastic process used in statistical calculations in which ...
  4. Stochastic Volatility - SV

    A statistical method in mathematical finance in which volatility ...
  5. Return

    The gain or loss of a security in a particular period. The return ...
  6. Forecasting

    The use of historic data to determine the direction of future ...
Related Articles
  1. Investing

    Understanding Financial Models

    A financial model is a representation of some aspects of a firm or given security. It uses historical numbers to create calculations that inform financial recommendations or predict future financial ...
  2. Investing

    Volatile Stocks: Great, If You Have The Stomach

    Volatile stocks can be a lucrative opportunity for short-term traders. For buy-and-hold investors, it's a much different story.
  3. Investing

    How to Calculate Risk Premium

    Think of a risk premium as a form of hazard pay for risky investments.
  4. Small Business

    Calculating (Small) Company Credit Risk

    Determining creditworthiness of smaller and medium-sized corporations isn't as easy as for larger companies, but these tips can help.
  5. Investing

    How Do Professionals Forecast Crude Oil Prices?

    Discover how the future price of oil is predicted with a weighted combination of mathematical tools. Economists largely use five main models as their base.
  6. Investing

    The Basics Of Business Forecasting

    Discover the methods behind financial forecasts and the risks inherent when we seek to predict the future.
  7. Investing

    Explaining Expected Return

    The expected return is a tool used to determine whether or not an investment has a positive or negative average net outcome.
  8. Retirement

    Can Your Retirement Portfolio Rely on High Rates of Return?

    Some experts speculate that stock market returns may be headed downward and investors should strategize accordingly. But are they right?
  9. Investing

    Understanding Statistics

    Statistics provide the means to analyze data and then summarize it into a numerical form.
  10. Investing

    How to Calculate Required Rate of Return

    The required rate of return is used by investors and corporations to evaluate investments. Find out how to calculate it.
RELATED FAQS
  1. What is the difference between financial forecasting and financial modelling?

    Understand the difference between financial forecasting and financial modeling, and learn why a company should conduct both ... Read Answer >>
  2. What's the difference between budgeting and financial forecasting?

    Learn about financial budgeting and financial forecasting and the main differences between the two management decision-making ... Read Answer >>
  3. How is the expected market return determined when calculating market risk premium?

    Find out how the expected market return rate is determined when calculating market risk premium and how these figures are ... Read Answer >>
  4. How do traders identify key signals from the autoregressive moving average?

    See how traders and technical analysts use autoregressive moving averages to create forecasting models, and learn why this ... Read Answer >>
  5. How does market risk affect the cost of capital?

    Find out how market risk directly affects the total cost of capital, including how to use the capital asset pricing model ... Read Answer >>
  6. How does the required rate of return affect the price of a stock, in terms of the ...

    First, a quick review: the required rate of return is defined as the return, expressed as a percentage, that an investor ... Read Answer >>
Hot Definitions
  1. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  2. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  3. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  4. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  5. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  6. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
Trading Center