Department of Economics and Business Economics

Specification and testing of Multiplicative Time-Varying GARCH models with applications

Research output: Research - peer-reviewJournal article

DOI

In this article, we develop a specification technique for building multiplicative time-varying GARCH models of Amado and Teräsvirta (2008, 2013). The variance is decomposed into an unconditional and a conditional component such that the unconditional variance component is allowed to evolve smoothly over time. This nonstationary component is defined as a linear combination of logistic transition functions with time as the transition variable. The appropriate number of transition functions is determined by a sequence of specification tests. For that purpose, a coherent modelling strategy based on statistical inference is presented. It is heavily dependent on Lagrange multiplier type misspecification tests. The tests are easily implemented as they are entirely based on auxiliary regressions. Finite-sample properties of the strategy and tests are examined by simulation. The modelling strategy is illustrated in practice with two real examples: an empirical application to daily exchange rate returns and another one to daily coffee futures returns.
Original languageEnglish
JournalEconometric Reviews
Volume36
Issue number4
Pages (from-to)421-446
ISSN0747-4938
DOIs
StatePublished - 2017

    Research areas

  • Conditional heteroskedasticity, Misspecitication testing, Modeling volatility, Nonlinear model building, Time-varying parameter model

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