Department of Economics and Business Economics

A Lagrange Multiplier Test for Testing the Adequacy of the Constant Conditional Correlation GARCH Model

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    Submitted manuscript, 411 KB, PDF-document

  • Paul Catani
    Paul CataniHenken School of EconomicsFinland
  • Timo Teräsvirta
  • Meiqun Yin
    Meiqun YinBeijing International Studies UniversityChina
A Lagrange multiplier test for testing the parametric structure of a constant conditional correlation generalized autoregressive conditional heteroskedasticity (CCC-GARCH) model is proposed. The test is based on decomposing the CCC-GARCH model multiplicatively into two components, one of which represents the null model, whereas the other one describes the misspeci…cation. A simulation study shows that the test has good …nite sample properties. We compare the test with other tests for misspeci…cation of multivariate GARCH models. The test has high power against alternatives where the misspeci…cation is in the GARCH parameters and is superior to other tests. The test is not greatly affected by misspeci…cation in the conditional correlations and is therefore well suited for considering misspeci…cation of GARCH equations.
Original languageEnglish
Place of publicationAarhus
PublisherInstitut for Økonomi, Aarhus Universitet
Number of pages24
StatePublished - 3 Feb 2014
SeriesCREATES Research Papers
Number2014-03

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