My question is how to make code when I model GARCH volatility by adding explanatory variable.
For example, I would like to add variable X(short-term interest rate) in the conditional variance equation of stock market return (Y). This means that the volatility of stock market returns at time t is affected by short-term interest rate at time t. Please let me know the code sample, assuming simple GARCH(1,1) model.
Here's an example of a GARCH(1,1) model using PROC MODEL which includes a simple linear dependence of the volatility on interest rate. The data set 'drate' would contain an endogenous variable 'y' of stock market returns, and 'x' of interest rates.
proc model data=dratee;
/* Mean model */
y = sret;
/* Variance model ----------------*/
h.y = b*x
+ arch0 + arch1*xlag(resid.y**2, mse.y) + garch1*xlag(h.y, mse.y);
bounds b arch0 arch1 garch1 >= 0;
fit y / fiml;
Registration is open! SAS is returning to Vegas for an AI and analytics experience like no other! Whether you're an executive, manager, end user or SAS partner, SAS Innovate is designed for everyone on your team. Register for just $495 by 12/31/2023.
If you are interested in speaking, there is still time to submit a session idea. More details are posted on the website.
Learn how to run multiple linear regression models with and without interactions, presented by SAS user Alex Chaplin.
Find more tutorials on the SAS Users YouTube channel.