Abstract
Abstract The log-TGARCHX model is less restrictive in terms of the inclusion of exogenous variables and asymmetry lags compared to the GARCHX model. Nevertheless, adding less (or more) covariates than necessary may lead to under- or overfitting, respectively. In this context, we propose a new algorithm, called VS-LTGARCHX, which incorporates a variable selection procedure into the log-TGARCHX estimation process. Furthermore, the VS-LTGARCHX algorithm is applied to extremely volatile BTC markets using 42 conditioning variables. Interestingly, our results show that the VS-LTGARCHX models outperform benchmark models, namely the log-GARCH(1,1) and log-TGARCHX(1,1) models, in one-step-ahead forecasting.
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