The Threshold log GARCH Stochastic Volatility Model

In this article, we introduce a new class of volatility models, referred to asThreshold log GARCH-SV (T-log GARCH-SV) models, designed tocapture asymmetry and leverage effects in the volatility of financial timeseries. Our model extends the symmetric log GARCH-SV framework byincorporating a threshold effect into the log-volatility equation, makingit particularly well-suited for modeling time-varying volatility withregime-dependent dynamics. This new formulation enhances the flexibility ofexisting SV-type models. We establish a sufficient condition to ensurestrict stationarity, geometric ergodicity, and the existence of higher-orderlog-moments. For parameter estimation, we propose a quasi-maximumlikelihood approach that combines an Expectation Maximization algorithm withparticle filtering and smoothing techniques. The performance of the proposedmethod is evaluated through a Monte Carlo simulation study. Finally, we applyour formulation to the S&P 500 stock index. The empirical resultsdemonstrate that the T-log GARCH-SV model outperforms competing$SV$-type models in volatility forecasting, highlighting its effectiveness incapturing asymmetries in financial return dynamics.

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Publication Details

Journal
Austrian Journal of Statistics
Published
2026-10-26
DOI
https://doi.org/10.17713/ajs.v55i4.2441
Primary Topic
Financial Risk and Volatility Modeling
Type
article
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article

The Threshold log GARCH Stochastic Volatility Model

Hafida Guerbyenne, Fayçal Hamdi, Rokia Hemis
Austrian Journal of Statistics
Financial Risk and Volatility Modeling
article

The Threshold log GARCH Stochastic Volatility Model

Hafida Guerbyenne, Fayçal Hamdi, Rokia Hemis
article en

Abstract

In this article, we introduce a new class of volatility models, referred to asThreshold log GARCH-SV (T-log GARCH-SV) models, designed tocapture asymmetry and leverage effects in the volatility of financial timeseries. Our model extends the symmetric log GARCH-SV framework byincorporating a threshold effect into the log-volatility equation, makingit particularly well-suited for modeling time-varying volatility withregime-dependent dynamics. This new formulation enhances the flexibility ofexisting SV-type models. We establish a sufficient condition to ensurestrict stationarity, geometric ergodicity, and the existence of higher-orderlog-moments. For parameter estimation, we propose a quasi-maximumlikelihood approach that combines an Expectation Maximization algorithm withparticle filtering and smoothing techniques. The performance of the proposedmethod is evaluated through a Monte Carlo simulation study. Finally, we applyour formulation to the S&P 500 stock index. The empirical resultsdemonstrate that the T-log GARCH-SV model outperforms competing$SV$-type models in volatility forecasting, highlighting its effectiveness incapturing asymmetries in financial return dynamics.

Austrian Journal of Statistics
University of Sciences and Technology Houari Boumediene (DZ)
Openalex Percentile: Top 8%
Financial Risk and Volatility Modeling
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The Threshold log GARCH Stochastic Volatility Model — Hafida Guerbyenne, Fayçal Hamdi, et al. · Austrian Journal of Statistics (2026) | TGRS Research Map | TGRS