GARCH Models – Understanding Long-Run Variance LRV for TGARCH and GJR-GARCH

garchvolatility

As LRV calculation from GARCH parameters is on annual basis:

$$ LRV = \frac{\omega}{1 – \alpha – \beta} \cdot 252 $$

I wonder if it's not a composition of unconditional variance divided by the model persistence?

As the spec of TGARCH is based simply on $\sigma$ and not on $\sigma^2$, what could be the LRV knowing that its persistence?

My potential answer:
$$ LRV = \bigg(\frac{\omega}{1- \beta – \alpha/\sqrt{2 \pi} – \theta/\sqrt{2 \pi}}\bigg)^2 \cdot 252 $$

And for GJR-GARCH what would it be?

My potential answer:
$$ LRV = \frac{\omega}{1 – ( \alpha + \theta/2 + \beta)} \cdot 252 $$

Thank you for your help.

Best Answer

In your case, the (annualized) long run variance can be calculated as $$ LRV=E(\sigma_t^2) \cdot 252 $$ or in terms of standard deviations as $$ LRV=\sqrt{E(\sigma_t^2)}\sqrt{252} $$ assuming that there are $252$ trading days within a year and that you estimate your model on daily returns. Now, depending on your model, the expression for $E(\sigma_t^2)$ differs.

For instance, for the GARCH(1,1) you have: $$ E(\sigma_t)^2=\frac{\omega}{1-\alpha-\beta} $$ For the GJR-GARCH(1,1) you get $$ E(\sigma_t^2)=\frac{\omega}{1-\alpha-\frac{\theta}2{-\beta}} $$ if you assume a symmetric distribution for the error term.

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