The Study On VFB-GARCH

In stock market, return rates always goes along with risks which are often defined as the volatility of stock price. Because stock price is influenced by various factors such as the psychology of individuals and groups while the interactions of such factors are complicated, how to definitely measure the volatility becomes a hot topic for scholars home and abroad. Empirical study shows that the volatility of stock price is nonlinear and unbalanced, while the mean and variance of return is auto-correlative and unstable. In order to study the volatility of stock market, the theories of ARCH Models and SV Models are developed when the theoretic form is improved from linear one to nonlinear one, among which the nonlinear GARCH Model is the most notable. However, most of those nonlinear methods are focusing on the rule of stock data, and the influence of psychological factors is seldom considered.Based on the former studies, this paper combines the Prospect Theory, Value Function, Leverage Effect and GARCH Model to set up a VFB-GARCH(Value Function Based GARCH)Model which can reflect the psychological factors of investors. Then it put forwards the parameters'estimation of Maximum Likelihood Function Method which is used in the empirical research.