Generalized AutoRegressive Conditional Heteroskedasticity (GARCH) Process

AAA

DEFINITION of 'Generalized AutoRegressive Conditional Heteroskedasticity (GARCH) Process '

An econometric term developed in 1982 by Robert F. Engle, an economist and 2003 winner of the Nobel Memorial Prize for Economics to describe an approach to estimate volatility in financial markets. There are several forms of GARCH modeling. The GARCH process is often preferred by financial modeling professionals because it provides a more real-world context than other forms when trying to predict the prices and rates of financial instruments.

INVESTOPEDIA EXPLAINS 'Generalized AutoRegressive Conditional Heteroskedasticity (GARCH) Process '

The general process for a GARCH model involves three steps. The first is to estimate a best-fitting autoregressive model; secondly, compute autocorrelations of the error term and lastly, test for significance.

GARCH models are used by financial professionals in several arenas including trading, investing, hedging and dealing. Two other widely-used approaches to estimating and predicting financial volatility are the classic historical volatility (VolSD) method and the exponentially weighted moving average volatility (VolEWMA) method.

RELATED TERMS
  1. Volatility Smile

    A u-shaped pattern that develops when an option’s implied volatility ...
  2. Euler's Constant

    The limit of the sum of 1 + 1/2 + 1/3 + 1/4 ... + 1/n, minus ...
  3. Autoregressive Conditional Heteroskedasticity ...

    An econometric term used for observed time series. ARCH models ...
  4. Robert F. Engle III

    An American economist who won the 2003 Nobel Memorial Prize in ...
  5. Multivariate Model

    A popular statistical tool that uses multiple variables to forecast ...
  6. Volatility Skew

    The difference in implied volatility (IV) between out-of-the-money, ...
RELATED FAQS
  1. No results found.
Related Articles
  1. Options & Futures

    Implied Volatility: Buy Low And Sell High

    This value is an essential ingredient in the option pricing recipe.
  2. Options & Futures

    Volatility's Impact On Market Returns

    Find out how to adjust your portfolio when the market fluctuates to increase your potential return.
  3. Options & Futures

    Option Price-Volatility Relationship: Avoiding Negative Surprises

    Learn about the price-volatility dynamic and its dual effect on option positions.
  4. Options & Futures

    An Option Strategy for Trading Market Bottoms

    The reverse calendar spreads offers a low-risk trading setup that has profit potential in both directions.
  5. Options & Futures

    The ABCs Of Option Volatility

    The mystery of options pricing can often be explained by a look at implied volatility (IV).
  6. Fundamental Analysis

    Exploring The Exponentially Weighted Moving Average

    Learn how to calculate a metric that improves on simple variance.
  7. Investing

    How to Use Stratified Random Sampling

    Stratified random sampling is a technique best used with a sample population easily broken into distinct subgroups. Samples are then taken from each subgroup based on the ratio of the subgroup’s ...
  8. Economics

    How A Limited Government Affects A Country's Finances

    Countries with limited governments have fewer laws about what individuals and businesses can and can’t do. What's the net result?
  9. Fundamental Analysis

    Lognormal and Normal Distribution

    When and why do you use lognormal distribution or normal distribution for analyzing securities? Lognormal for stocks, normal for portfolio returns.
  10. Investing Basics

    How Does Goodwill Affect Financial Statements?

    Goodwill is a bit of a paradox--intangible, yet it is recorded as an asset on the purchasing company's balance sheet.

You May Also Like

Hot Definitions
  1. Sunk Cost

    A cost that has already been incurred and thus cannot be recovered. A sunk cost differs from other, future costs that a business ...
  2. Technical Skills

    1. The knowledge and abilities needed to accomplish mathematical, engineering, scientific or computer-related duties, as ...
  3. Prepaid Expense

    A type of asset that arises on a balance sheet as a result of business making payments for goods and services to be received ...
  4. Gordon Growth Model

    A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. ...
  5. Cost Accounting

    A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step ...
  6. Law Of Supply

    A microeconomic law stating that, all other factors being equal, as the price of a good or service increases, the quantity ...
Trading Center