Testing constancy of unconditional variance in volatility models by misspecification and specification tests

Publikation: Working paperForskning

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  • rp15_47

    Accepteret manuskript, 464 KB, PDF-dokument

  • Annastiina Silvennoinen, School of Economics and Finance, Queensland University of Technology, Australien
  • Timo Terasvirta
The topic of this paper is testing the hypothesis of constant unconditional variance in GARCH models against the alternative that the unconditional variance changes deterministically over time. Tests of this hypothesis have previously been performed as misspecification tests after fitting a GARCH model to the original series. It is found by simulation that the positive size distortion present in these tests is a function of the kurtosis of the GARCH process. Adjusting the size by numerical methods is considered. The possibility of testing the constancy of the unconditional variance before fitting a GARCH model to the data is discussed. The power of the ensuing test is vastly superior to that of the misspecification test and the size distortion minimal. The test has reasonable power already in very short time series. It would thus serve as a test of constant variance in conditional mean models. An application to exchange rate returns is included.
OriginalsprogEngelsk
UdgivelsesstedAarhus
UdgiverInstitut for Økonomi, Aarhus Universitet
Antal sider29
StatusUdgivet - 27 okt. 2015
SerietitelCREATES Research Papers
Nummer2015-47

    Forskningsområder

  • autoregressive conditional heteroskedasticity, modelling volatility, testing parameter constancy, time-varying GARCH

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