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

Publikation: Working paperForskning

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  • rp14_03

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  • Paul Catani, Henken School of Economics, Finland
  • Timo Teräsvirta
  • Meiqun Yin, Beijing International Studies University, Kina
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.
OriginalsprogEngelsk
UdgivelsesstedAarhus
UdgiverInstitut for Økonomi, Aarhus Universitet
Antal sider24
StatusUdgivet - 3 feb. 2014
SerietitelCREATES Research Papers
Nummer2014-03

    Forskningsområder

  • constant conditional correlation, LM test, misspeci…cation testing, modelling volatility, multivariate GARCH

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