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ABSTRACT:
The quest for the ‘best’ heavy-tailed distribution for ARCH/GARCH residuals appears to still be ongoing. In this connection, we propose a new distribution that arises in a natural way as an outcome of an implicit model. The challenging application of prediction of squared returns is also discussed; an optimal predictor is formulated, and the usefulness of the new distribution for prediction is demonstrated on three real datasets.

SUGGESTED CITATION:
Dimitris N. Politis, "A heavy-tailed distribution for ARCH residuals with application to volatility prediction" (January 1, 2004). Department of Economics, UCSD. Paper 2004-01.
http://repositories.cdlib.org/ucsdecon/2004-01