Why ARMAX-GARCH Linear Models Successfully Describe Complex Nonlinear Phenomena: A Possible Explanation

Authors

Hung T. Nguyen, New Mexico State University - Main CampusFollow
Vladik Kreinovich, The University of Texas at El PasoFollow
Olga Kosheleva, The University of Texas at El PasoFollow
Songsak Sriboonchitta, Chiang Mai UniversityFollow

Publication Date

5-2015

Comments

Technical Report: UTEP-CS-15-40

Abstract

Economic and financial processes are complex and highly nonlinear. However, somewhat surprisingly, linear models like ARMAX-GARCH often describe these processes reasonably well. In this paper, we provide a possible explanation for the empirical success of these models.