Multimodality and the GARCH Likelihood
AbstractWe investigate several aspects of GARCH models which are relevant for empirical applications. In particular, we note that the inclusion of a dummy variable as regressor can lead to multimodality in the GARCH likelihood. This makes standard inference on the estimated coefficient impossible. Next, we investigate the implementation of different restrictions on the GARCH parameter space. We present a small refinement to the Nelson and Cao (1992) conditions for a GARCH(2,q) model, and show how these can be implemented by parameter transformations. We argue that these conditions are also too restrictive, and consider restrictions which are formulated in terms of the unconditional variance. These are easier to work with and understand. Finally, we show that multimodality is a real concern for models of the pound/dollar exchange rate, and should be taken account of, especially when p>=2.
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Date of creation: 01 Aug 2000
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- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
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