Modelling Conditional and Unconditional Heteroskedasticity with Smoothly Time-Varying Structure

Publikation: Working paperForskning

  • Institut for Økonomi
In this paper, we propose two parametric alternatives to the standard GARCH model.
They allow the conditional variance to have a smooth time-varying structure of either ad-
ditive or multiplicative type. The suggested parameterizations describe both nonlinearity
and structural change in the conditional and unconditional variances where the transition
between regimes over time is smooth. A modelling strategy for these new time-varying
parameter GARCH models is developed. It relies on a sequence of Lagrange multiplier
tests, and the adequacy of the estimated models is investigated by Lagrange multiplier
type misspecification tests. Finite-sample properties of these procedures and tests are
examined by simulation. An empirical application to daily stock returns and another one
to daily exchange rate returns illustrate the functioning and properties of our modelling
strategy in practice. The results show that the long memory type behaviour of the sample
autocorrelation functions of the absolute returns can also be explained by deterministic
changes in the unconditional variance.
OriginalsprogEngelsk
UdgivelsesstedAarhus
UdgiverInstitut for Økonomi, Aarhus Universitet
Antal sider56
StatusUdgivet - 2008

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