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ARCH and Bilinearity as Competing Models for Nonlinear Dependence

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  • Bera, Anil K
  • Higgins, Matthew L

Abstract

This paper consider whether the wide acceptance of ARCH models may be at the expense of other nonlinear processes, such as bilinear models. The authors first pose a joint test for ARCH and bilinearity. A nonnested test is then suggested. The tests are then applied to three series. When GARCH models are taken as the null hypothesis, the authors fail to reject it. However, when bilinearity is taken as the null, it is rejected in two cases. Also, an out-of-sample forecasting exercise shows that the GARCH model is superior. The results, therefore, indicate a strong preference for the GARCH model.

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Bibliographic Info

Article provided by American Statistical Association in its journal Journal of Business and Economic Statistics.

Volume (Year): 15 (1997)
Issue (Month): 1 (January)
Pages: 43-50

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Handle: RePEc:bes:jnlbes:v:15:y:1997:i:1:p:43-50

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Cited by:
  1. Juan Carlos Escanciano, 2006. "Joint Diagnostic Tests for Conditional Mean and Variance Specifications," Faculty Working Papers 02/06, School of Economics and Business Administration, University of Navarra.
  2. Blake, Andrew P. & Kapetanios, George, 2007. "Testing for ARCH in the presence of nonlinearity of unknown form in the conditional mean," Journal of Econometrics, Elsevier, vol. 137(2), pages 472-488, April.
  3. Mohamed El Hedi Arouri & Shawkat Hammoudeh & Duc Khuong Nguyen & Amine Lahiani, 2013. "On the short- and long-run efficiency of energy and precious metal markets," Working Papers hal-00798036, HAL.
  4. Yi-Ting Chen & Chung-Ming Kuan, 2003. "A Generalized Jarque-Bera Test of Conditional Normality," IEAS Working Paper : academic research 03-A003, Institute of Economics, Academia Sinica, Taipei, Taiwan.
  5. Lumsdaine, Robin L. & Ng, Serena, 1999. "Testing for ARCH in the presence of a possibly misspecified conditional mean," Journal of Econometrics, Elsevier, vol. 93(2), pages 257-279, December.
  6. Charemza W.W. & M. Lifshits & S. Makarova, 2002. "Conditional testing for unit-root bilinearity in financial time series: some theoretical and empirical results," Computing in Economics and Finance 2002 251, Society for Computational Economics.
  7. Carlos Escanciano, J., 2008. "Joint and marginal specification tests for conditional mean and variance models," Journal of Econometrics, Elsevier, vol. 143(1), pages 74-87, March.
  8. Ravikumar, B. & Ray, Surajit & Savin, N.E., 1999. "CAPM Reconsidered: A Robust Finite Sample Evaluation," Working Papers 99-04, University of Iowa, Department of Economics.
  9. Juan Carlos Escanciano & Carlos Velasco, . "Testing the Martingale Difference Hypothesis Using Integrated Regression Functions," Faculty Working Papers 06/06, School of Economics and Business Administration, University of Navarra.
  10. Ser-Huang Poon & Clive W.J. Granger, 2003. "Forecasting Volatility in Financial Markets: A Review," Journal of Economic Literature, American Economic Association, vol. 41(2), pages 478-539, June.
  11. El Bouhadi, Abdelhamid & Achibane, Khalid, 2009. "The Predictive Power of Conditional Models: What Lessons to Draw with Financial Crisis in the Case of Pre-Emerging Capital Markets?," MPRA Paper 19482, University Library of Munich, Germany.
  12. Wasel Shadat, 2011. "On the Nonparametric Tests of Univariate GARCH Regression Models," The School of Economics Discussion Paper Series 1115, Economics, The University of Manchester.
  13. Chris Brooks & Simon Burke, 2003. "Information criteria for GARCH model selection," The European Journal of Finance, Taylor & Francis Journals, vol. 9(6), pages 557-580.
  14. repec:wyi:journl:002062 is not listed on IDEAS
  15. Manuel A. Dominguez & Ignacio N. Lobato, 2001. "A Consistent Test for the Martingale Difference Hypothesis," Working Papers 0101, Centro de Investigacion Economica, ITAM.
  16. Chihwa Kao & Yongmiao Hong, 2004. "Detecting Neglected Nonlinearity in Dynamic Panel Data with Time-Varying Conditional Heteroskedasticity," Econometric Society 2004 Far Eastern Meetings 753, Econometric Society.
  17. Carlos Velasco & Ignacio N. Lobato, 2004. "A simple and general test for white noise," Econometric Society 2004 Latin American Meetings 112, Econometric Society.

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