What are GARCH models, what are they used for, and how can you implement them in Python? After completing this first chapter you’ll be able to confidently answer all these questions.


Why do we need GARCH models

Understand volatility

Observe volatility clustering

Calculate volatility

What are ARCH and GARCH

Review GARCH model basics

Simulate ARCH and GARCH series

Observe the impact of model parameters

How to implement GARCH models in Python

Review "arch" documentation

Implement a basic GARCH model

Make forecast with GARCH models

GARCH Model Fundamentals

A normal GARCH model is not representative of the real financial data, whose distributions frequently exhibit fat tails, skewness, and asymmetric shocks. In this chapter, you’ll learn how to define better GARCH models with more realistic assumptions. You’ll also learn how to make more sophisticated volatility forecasts with rolling window approaches.

Distribution assumptions

Fat tails and skewness

Plot distribution of standardized residuals

Fit a GARCH with skewed t-distribution

Mean model specifications

Check mean model assumptions

Effect of mean model on volatility predictions

Volatility models for asymmetric shocks

Modeling of asymmetric responses of volatility

Fit GARCH models to cryptocurrency

Compare GJR-GARCH with EGARCH

GARCH rolling window forecast

Why use rolling window forecast

Fixed rolling window forecast

Compare forecast results

GARCH Model Configuration

This chapter introduces you to the KISS principle of data science modeling. You’ll learn how to use p-values and t-statistics to simplify model configuration, use ACF plot, Ljung-Box test to verify model assumptions and use likelihood and information criteria for model selection.

Significance testing of model parameters

Keep it simple stupid

Simplify the model with p-values

Simplify the model with t-statistics

Validation of GARCH model assumptions

Detect autocorrelations

ACF plot

Ljung-Box test

Goodness of fit measures

Goodness of fit basics

Pick a winner based on log-likelihood

Pick a winner based on AIC/BIC

GARCH model backtesting

Backtesting basics

Backtesting with MAE, MSE

Model Performance Evaluation

In this final chapter, you’ll learn how to apply the GARCH models you’ve previously learned to practical financial world scenarios. You’ll develop your skills as you become more familiar with VaR in risk management, dynamic covariance in asset allocation, and dynamic Beta in portfolio management.

VaR in financial risk management

VaR concept

Compute parametric VaR

Compute empirical VaR

Dynamic covariance in portfolio optimization

Covariance concept

Compute GARCH covariance

Compute dynamic portfolio variance

Dynamic Beta in portfolio management

Beta concept

Compute dynamic stock Beta

Congratulations!

GARCH in Action

SP500

Tesla stock price

Bitcoin price

Foreign exchange data

Volatility is an essential concept in finance, which is why GARCH models in Python are a popular choice for forecasting changes in variance, specifically when working with time-series data that are time-dependant. This course will show you how and when to implement GARCH models, how to specify model assumptions, and how to make volatility forecasts and evaluate model performance. Using real-world data, including historical Tesla stock prices, you’ll gain hands-on experience of how to better quantify portfolio risks, through calculations of Value-at-Risk, covariance, and stock Beta. You’ll also apply what you’ve learned to a wide range of assets, including stocks, indices, cryptocurrencies, and foreign exchange, preparing you to go forth and use GARCH models.

Time Series Analysis in Python

Learn about GARCH Models, how to implement them, and calibrate them on financial data. Apply what you learn to assets from stocks to foreign exchange.

GARCH Models in Python

Learn about GARCH Models, how to implement them and calibrate them on financial data from stocks to foreign exchange.

Finanças Aplicadas em Python

Data Science Instructor

Rolling window for out-of-sample forecast

Expanding window forecast

Motivations of rolling window forecast

Implement expanding window forecast

Implement fixed rolling window forecast

How to determine window size

Let's practice!

https://s3.amazonaws.com/assets.datacamp.com/production/course_22276/subtitles/course_22276_9aac41ae8886f1e79e206dfd90c2f57d.vtt

GARCH Model Configuration - GARCH rolling window forecast

GARCH rolling window forecast

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