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Simulated evidence on the distribution of the standardized one-step-ahead prediction errors in ARCH processes

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  • Stavros Degiannakis
  • Evdokia Xekalaki

Abstract

In statistical modelling contexts, the use of one-step-ahead prediction errors for testing hypotheses on the forecasting ability of an assumed model has been widely considered. Quite often, the testing procedure requires independence in a sequence of recursive standardized prediction errors, which cannot always be readily deduced particularly in the case of econometric modelling. In this paper, the results of a series of Monte Carlo simulations reveal that independence can be assumed to hold.

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Bibliographic Info

Article provided by Taylor and Francis Journals in its journal Applied Financial Economics Letters.

Volume (Year): 3 (2007)
Issue (Month): 1 (January)
Pages: 31-37

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Handle: RePEc:taf:apfelt:v:3:y:2007:i:1:p:31-37

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  1. Ding, Zhuanxin & Granger, Clive W. J., 1996. "Modeling volatility persistence of speculative returns: A new approach," Journal of Econometrics, Elsevier, vol. 73(1), pages 185-215, July.
  2. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
  3. Lawrence R. Glosten & Ravi Jagannathan & David E. Runkle, 1993. "On the relation between the expected value and the volatility of the nominal excess return on stocks," Staff Report 157, Federal Reserve Bank of Minneapolis.
  4. He, Changli & Terasvirta, Timo, 1999. "Properties of moments of a family of GARCH processes," Journal of Econometrics, Elsevier, vol. 92(1), pages 173-192, September.
  5. repec:att:wimass:9520 is not listed on IDEAS
  6. Engle, Robert F. & Mustafa, Chowdhury, 1992. "Implied ARCH models from options prices," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 289-311.
  7. Stavros Degiannakis & Evdokia Xekalaki, 2007. "Assessing the performance of a prediction error criterion model selection algorithm in the context of ARCH models," Applied Financial Economics, Taylor & Francis Journals, vol. 17(2), pages 149-171.
  8. Karanasos, Menelaos, 1999. "The second moment and the autocovariance function of the squared errors of the GARCH model," Journal of Econometrics, Elsevier, vol. 90(1), pages 63-76, May.
  9. Xekalaki, Evdokia & Degiannakis, Stavros, 2005. "Evaluating volatility forecasts in option pricing in the context of a simulated options market," Computational Statistics & Data Analysis, Elsevier, vol. 49(2), pages 611-629, April.
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