Department of Economics and Business Economics

Timo Teräsvirta

Testing constancy of unconditional variance in volatility models by misspecification and specification tests

Research output: Working paperResearch

Standard

Testing constancy of unconditional variance in volatility models by misspecification and specification tests. / Silvennoinen, Annastiina; Terasvirta, Timo.

Aarhus : Institut for Økonomi, Aarhus Universitet, 2015.

Research output: Working paperResearch

Harvard

APA

Silvennoinen, A., & Terasvirta, T. (2015). Testing constancy of unconditional variance in volatility models by misspecification and specification tests. Aarhus: Institut for Økonomi, Aarhus Universitet. CREATES Research Papers, No. 2015-47

CBE

MLA

Silvennoinen, Annastiina and Timo Terasvirta Testing constancy of unconditional variance in volatility models by misspecification and specification tests. Aarhus: Institut for Økonomi, Aarhus Universitet. (CREATES Research Papers; Journal number 2015-47). 2015., 29 p.

Vancouver

Author

Silvennoinen, Annastiina ; Terasvirta, Timo. / Testing constancy of unconditional variance in volatility models by misspecification and specification tests. Aarhus : Institut for Økonomi, Aarhus Universitet, 2015. (CREATES Research Papers; No. 2015-47).

Bibtex

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title = "Testing constancy of unconditional variance in volatility models by misspecification and specification tests",
abstract = "The topic of this paper is testing the hypothesis of constant unconditional variance in GARCH models against the alternative that the unconditional variance changes deterministically over time. Tests of this hypothesis have previously been performed as misspecification tests after fitting a GARCH model to the original series. It is found by simulation that the positive size distortion present in these tests is a function of the kurtosis of the GARCH process. Adjusting the size by numerical methods is considered. The possibility of testing the constancy of the unconditional variance before fitting a GARCH model to the data is discussed. The power of the ensuing test is vastly superior to that of the misspecification test and the size distortion minimal. The test has reasonable power already in very short time series. It would thus serve as a test of constant variance in conditional mean models. An application to exchange rate returns is included.",
keywords = "autoregressive conditional heteroskedasticity, modelling volatility, testing parameter constancy, time-varying GARCH",
author = "Annastiina Silvennoinen and Timo Terasvirta",
year = "2015",
month = "10",
day = "27",
language = "English",
publisher = "Institut for {\O}konomi, Aarhus Universitet",
type = "WorkingPaper",
institution = "Institut for {\O}konomi, Aarhus Universitet",

}

RIS

TY - UNPB

T1 - Testing constancy of unconditional variance in volatility models by misspecification and specification tests

AU - Silvennoinen, Annastiina

AU - Terasvirta, Timo

PY - 2015/10/27

Y1 - 2015/10/27

N2 - The topic of this paper is testing the hypothesis of constant unconditional variance in GARCH models against the alternative that the unconditional variance changes deterministically over time. Tests of this hypothesis have previously been performed as misspecification tests after fitting a GARCH model to the original series. It is found by simulation that the positive size distortion present in these tests is a function of the kurtosis of the GARCH process. Adjusting the size by numerical methods is considered. The possibility of testing the constancy of the unconditional variance before fitting a GARCH model to the data is discussed. The power of the ensuing test is vastly superior to that of the misspecification test and the size distortion minimal. The test has reasonable power already in very short time series. It would thus serve as a test of constant variance in conditional mean models. An application to exchange rate returns is included.

AB - The topic of this paper is testing the hypothesis of constant unconditional variance in GARCH models against the alternative that the unconditional variance changes deterministically over time. Tests of this hypothesis have previously been performed as misspecification tests after fitting a GARCH model to the original series. It is found by simulation that the positive size distortion present in these tests is a function of the kurtosis of the GARCH process. Adjusting the size by numerical methods is considered. The possibility of testing the constancy of the unconditional variance before fitting a GARCH model to the data is discussed. The power of the ensuing test is vastly superior to that of the misspecification test and the size distortion minimal. The test has reasonable power already in very short time series. It would thus serve as a test of constant variance in conditional mean models. An application to exchange rate returns is included.

KW - autoregressive conditional heteroskedasticity, modelling volatility, testing parameter constancy, time-varying GARCH

M3 - Working paper

BT - Testing constancy of unconditional variance in volatility models by misspecification and specification tests

PB - Institut for Økonomi, Aarhus Universitet

CY - Aarhus

ER -