Department of Economics and Business Economics

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

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Specification and testing of Multiplicative Time-Varying GARCH models with applications. / Amado, Cristina; Teräsvirta, Timo.

In: Econometric Reviews, Vol. 36, No. 4, 2017, p. 421-446.

Research output: Research - peer-reviewJournal article

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@article{6a48321673bd4d53973a7aa35e86a52c,
title = "Specification and testing of Multiplicative Time-Varying GARCH models with applications",
abstract = "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.",
keywords = "Conditional heteroskedasticity, Misspecitication testing, Modeling volatility, Nonlinear model building, Time-varying parameter model",
author = "Cristina Amado and Timo Teräsvirta",
year = "2017",
doi = "10.1080/07474938.2014.977064",
volume = "36",
pages = "421--446",
journal = "Econometric Reviews",
issn = "0747-4938",
publisher = "Taylor & Francis Inc.",
number = "4",

}

RIS

TY - JOUR

T1 - Specification and testing of Multiplicative Time-Varying GARCH models with applications

AU - Amado,Cristina

AU - Teräsvirta,Timo

PY - 2017

Y1 - 2017

N2 - 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.

AB - 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.

KW - Conditional heteroskedasticity

KW - Misspecitication testing

KW - Modeling volatility

KW - Nonlinear model building

KW - Time-varying parameter model

U2 - 10.1080/07474938.2014.977064

DO - 10.1080/07474938.2014.977064

M3 - Journal article

VL - 36

SP - 421

EP - 446

JO - Econometric Reviews

T2 - Econometric Reviews

JF - Econometric Reviews

SN - 0747-4938

IS - 4

ER -