# GARCH Estimation Problem---- This is not a R problem but an econometric problem

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## GARCH Estimation Problem---- This is not a R problem but an econometric problem

 Â  Hi All, I need your help. I have 9 stock returns(y) to analyze. I am running an regression : y on lagged values of Y and X1&X2 (exogenous variables). If I run an olsÂ  regression thenÂ  LM test etc on the residuals shows existence of GARCHÂ  effect.(although there are serial correlation present in the residuals Â too but they are mild i.e. significant at 10% level ) Therefore I proceed to model the volatility using an appropriate GARCH model. Going by the method suggested by Walter Enders calculate RSSâ, AICâ , BICâ etc. I restricted my search in 6 models ....fromÂ  GARCH(1,1) to GARCH(2,2) only. Suppose these exercises is suggestingÂ  me a GARCH(1,1) or EGARCH(1,1) model. But after I fit the model and collect the residuals and subject Â them Â to tests, I observe: though there are no GARCH effect left (LB stat is giving p-values as 0.9999 for squared residuals ) but I am finding serial correlations of the residuals have increased(now almost all of them are significant at 5% level).So it appears GARCH modeling is taking care of GARCH effect but spuriously introducing serial correlation in the residuals. I have checked with model specifications ..theoretically it seems ok and this phenomena is true for 3 stocks out of 9. Rest 6 are yieldingÂ  nice/good results in terms no serial correlation in both residuals and squared residuals. So where the estimation/ GARCH modeling is going wrong? Why this is happening.Anyidea? Also if the sum of the coefficients (constant+ ARCH term + GARCH Term) is greater than one(1) then what does this imply? Should I Go for an I-GARCH model even if my dependent variable in the mean equation is I(0). Â Kaushik Bhattacharjee               [[alternative HTML version deleted]] _______________________________________________ [hidden email] mailing list https://stat.ethz.ch/mailman/listinfo/r-sig-finance-- Subscriber-posting only. If you want to post, subscribe first. -- Also note that this is not the r-help list where general R questions should go.