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

Silvennoinen, Annastiina & Terasvirta, Timo (2016) Testing constancy of unconditional variance in volatility models by misspecification and specification tests. Studies in Nonlinear Dynamics and Econometrics, 20(4), pp. 347-364.

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Abstract

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.

Impact and interest:

1 citations in Scopus
1 citations in Web of Science®
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ID Code: 99922
Item Type: Journal Article
Refereed: Yes
Keywords: autoregressive conditional heteroskedasticity, modeling volatility, testing parameter constancy, time-varying GARCH
DOI: 10.1515/snde-2015-0033
ISSN: 1558-3708
Divisions: Current > QUT Faculties and Divisions > QUT Business School
Current > Schools > School of Economics & Finance
Copyright Owner: Copyright 2016 Walter de Gruyter GmbH
Deposited On: 12 Oct 2016 06:43
Last Modified: 01 Feb 2017 14:01

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