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Testing Conditional Dynamics in Asymmetry. A Residual-Based Approach

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  • Philippe Lambert
  • Sébastien Laurent

Abstract

We propose three residual-based tests for conditional dynamic asymmetry. Estimation is performed under the null hypothesis of constant asymmetry of the innovations and, in a second step, the tests are performed either through a parametric model or a nonparametric method (runs). The working distribution is assumed to fall into the class of skewed distributions of Fernandez and Steel (1998) for which asymmetry is measured by the ratio between the probabilities of being larger and smaller than the mode. We derive the asymptotic distribution of the tests that incorporates the uncertainty of the estimated parameters in the first step. A Monte Carlo study shows that neglecting this uncertainty severely biases the tests and an empirical application on a basket of daily returns reveals that financial data often present dynamics in the conditional skewness.

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Bibliographic Info

Paper provided by ULB -- Universite Libre de Bruxelles in its series Working Papers ECARES with number 2008_009.

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Length: 29 p.
Date of creation: 2008
Date of revision:
Publication status: Published by:
Handle: RePEc:eca:wpaper:2008_009

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Keywords: Conditional skewness; asymmetry; residuals;

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References

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  1. Bai, Jushan & Ng, Serena, 2001. "A consistent test for conditional symmetry in time series models," Journal of Econometrics, Elsevier, vol. 103(1-2), pages 225-258, July.
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  14. Yongmiao Hong, 2005. "Nonparametric Specification Testing for Continuous-Time Models with Applications to Term Structure of Interest Rates," Review of Financial Studies, Society for Financial Studies, vol. 18(1), pages 37-84.
  15. GIOT, Pierre & LAURENT, Sébastien, . "Value-at-Risk for long and short trading positions," CORE Discussion Papers RP -1707, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  16. Y. K. Tse, 2002. "Residual-based diagnostics for conditional heteroscedasticity models," Econometrics Journal, Royal Economic Society, vol. 5(2), pages 358-374, 06.
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