Well, i'm interested in model a GARCH for a serie. The original serie is $y_t$ (price index of a Stock Market), which has a unit root. So i create the returns: $x_t = ln(y_t) - ln(y_{t-1})$. Now, i'm confused about the fact of using $\lvert x_t\rvert$ for my GARCH. Why can i use absolute value, i'm thinking, that because i want to model volatility i'm just interested in how the series deviates from his mean in a period of time? Thank's a lot for the answers!

  • $\begingroup$ This would better fit Cross Validated. Before posting there, check if the question (or a similar one) has not already been answered. $\endgroup$ Aug 23 '16 at 17:01

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