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Modeling of Financial Data: Comparison of the Truncated Lévy Flight and the ARCH(1) and GARCH(1,1) processes

Rosario N. Mantegna·H. Eugene Stanley
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Abstract

We compare our results on empirical analysis of financial data with simulations of two stochastic models of the dynamics of stock market prices. The two models are (i) the truncated Lévy flight recently introduced by us and (ii) the ARCH(1) and GARCH(1,1) processes. We find that the TLF well describes the scaling and its breakdown observed in empirical data, while it is not able to properly describe the fluctuations of volatility empirically detected. The ARCH(1) and GARCH(1,1) models are able to describe the probability density function of price changes at a given time horizon, but both fail to describe the scaling properties of the PDFs for short time horizons.

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Rosario N. Mantegna, H. Eugene Stanley. 1998-04-11. Modeling of Financial Data: Comparison of the Truncated Lévy Flight and the ARCH(1) and GARCH(1,1) processes. https://doi.org/10.1016/s0378-4371(98)00020-x

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