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Time irreversibility and EGARCH effects in US stock index returns

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  • Yi-Ting Chen

    (Institute for Social Sciences and Philosophy, Academia Sinica, Taipei 115, Taiwan)

  • Chung-Ming Kuan

    (Institute of Economics, Academia Sinica, Taipei 115, Taiwan)

Abstract

In this paper we suggest using a modified version of the time reversibility (TR) test of Chen, Chou and Kuan (2000) as a complementary diagnostic test for time series models. The modified CCK test is easy to compute and requires weaker moment conditions than existing tests. Our simulations demonstrate that this test is powerful against asymmetry in volatility but the BDS test is not. In the empirical study of US stock index returns, we first find that these returns are all time irreversible. Applying the GARCH and EGARCH models to these returns, we also find that the Q and BDS tests always accept the null hypothesis and cannot distinguish between these models. By contrast, the modified CCK test accepts only the EGARCH model with an order that can accommodate the underlying asymmetry in volatility. Our results suggest that the detected time irreversibility in these return series may be attributed to volatility asymmetry and that such asymmetry may be captured using a proper EGARCH model. Copyright © 2002 John Wiley & Sons, Ltd.

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Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

Volume (Year): 17 (2002)
Issue (Month): 5 ()
Pages: 565-578

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Handle: RePEc:jae:japmet:v:17:y:2002:i:5:p:565-578

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  1. Ramsey, James B & Rothman, Philip, 1996. "Time Irreversibility and Business Cycle Asymmetry," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(1), pages 1-21, February.
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  3. Brooks, Chris & Henry, Olan T., 2000. "Can portmanteau nonlinearity tests serve as general mis-specification tests?: Evidence from symmetric and asymmetric GARCH models," Economics Letters, Elsevier, vol. 67(3), pages 245-251, June.
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  5. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59.
  6. Hsieh, David A, 1991. " Chaos and Nonlinear Dynamics: Application to Financial Markets," Journal of Finance, American Finance Association, vol. 46(5), pages 1839-77, December.
  7. Brooks, Chris & Heravi, Saeed M, 1999. "The Effect of (Mis-Specified) GARCH Filters on the Finite Sample Distribution of the BDS Test," Computational Economics, Society for Computational Economics, vol. 13(2), pages 147-62, April.
  8. Engle, Robert F & Lilien, David M & Robins, Russell P, 1987. "Estimating Time Varying Risk Premia in the Term Structure: The Arch-M Model," Econometrica, Econometric Society, vol. 55(2), pages 391-407, March.
  9. Melvin J. Hinich & Philip Rothman, . "A Frequency Domain Test of Time Reversibility," Working Papers 9706, East Carolina University, Department of Economics.
  10. Chen, Yi-Ting & Chou, Ray Y. & Kuan, Chung-Ming, 2000. "Testing time reversibility without moment restrictions," Journal of Econometrics, Elsevier, vol. 95(1), pages 199-218, March.
  11. Rothman, P, 1992. "The Comparative Power of the TR Test against Simple Threshold Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages S187-95, Suppl. De.
  12. Hsieh, David A., 1993. "Implications of Nonlinear Dynamics for Financial Risk Management," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(01), pages 41-64, March.
  13. A. Abhyankar & L. S. Copeland & W. Wong, 1995. "Moment condition failure in high frequency financial data: evidence from the S&P 500," Applied Economics Letters, Taylor & Francis Journals, vol. 2(8), pages 288-290.
  14. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March.
  15. Lee, Sang-Won & Hansen, Bruce E., 1994. "Asymptotic Theory for the Garch(1,1) Quasi-Maximum Likelihood Estimator," Econometric Theory, Cambridge University Press, vol. 10(01), pages 29-52, March.
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Cited by:
  1. Beare, Brendan K. & Seo, Juwon, 2012. "Time irreversible copula-based Markov Models," University of California at San Diego, Economics Working Paper Series qt31f8500p, Department of Economics, UC San Diego.
  2. Giacomini, Raffaella & Gottschling, Andreas & Haefke, Christian & White, Halbert, 2007. "Mixtures of t-distributions for Finance and Forecasting," Economics Series 216, Institute for Advanced Studies.
  3. Evzen Kocenda & Lubos Briatka, 2004. "Advancing the iid Test Based on Integration across the Correlation Integral: Ranges, Competition, and Power," Econometrics 0409001, EconWPA.
  4. Ben Ameur, H. & Prigent, J.L., 2014. "Portfolio insurance: Gap risk under conditional multiples," European Journal of Operational Research, Elsevier, vol. 236(1), pages 238-253.
  5. Isao Ishida & Toshiaki Watanabe, 2009. "Modeling and Forecasting the Volatility of the Nikkei 225 Realized Volatility Using the ARFIMA-GARCH Model," CIRJE F-Series CIRJE-F-608, CIRJE, Faculty of Economics, University of Tokyo.
  6. Yi-Ting Chen, 2008. "A unified approach to standardized-residuals-based correlation tests for GARCH-type models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 23(1), pages 111-133.
  7. Belaire-Franch, Jorge & Contreras, Dulce, 2003. "Tests for time reversibility: a complementarity analysis," Economics Letters, Elsevier, vol. 81(2), pages 187-195, November.
  8. repec:ebl:ecbull:v:3:y:2004:i:23:p:1-17 is not listed on IDEAS

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