Groupe d’études et de recherche en analyse des décisions

Merits and drawbacks of variance targeting in GARCH models

Christian Francq Université Lille 3, France

Variance targeting estimation is a technique used to alleviate the numerical difficulties encountered in the quasi-maximum likelihood (QML) estimation of GARCH models. It relies on reparameterization of the model and a first-step estimation of the unconditional variance. The remaining parameters are estimated by QML in a second step. This paper establishes the asymptotic distribution of the estimators obtained by this method in univariate GARCH models. Comparisons with the standard QML are provided and the merits of the variance targeting method are discussed.