Testing for ARCH in the Presence of Additive Outliers
AbstractIn this paper we investigate the properties of the Lagrange Multiplier (LM) test for autoregressive conditional heteroscedasticity (ARCH) and generalized ARCH (GARCH) in the presence of additive outliers (AOs). We show analytically that both the asymptotic size and power are adversely affected if AOs are neglected: the test rejects the null hypothesis of homoscedasticity too often when it is in fact true, while the test has difficulty detecting genuine GARCH effects. Several Monte Carlo experiments show that these phenomena occur in small samples as well. We design and implement a robust test, which has better size and power properties than the conventional test in the presence of AOs. We apply the tests to a number of US macroeconomic time series, which illustrates the dangers involved when nonrobust tests for ARCH are routinely applied as diagnostic tests for misspecification.
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Bibliographic InfoArticle provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.
Volume (Year): 14 (1999)
Issue (Month): 5 (Sept.-Oct.)
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Web page: http://www.interscience.wiley.com/jpages/0883-7252/
Other versions of this item:
- Dijk, D.J.C. van & Franses, Ph.H.B.F. & Lucas, A., 1996. "Testing for ARCH in the Presence of Additive Outliers," Econometric Institute Report EI 9659-/A, Erasmus University Rotterdam, Econometric Institute.
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