Modelling Conditional and Unconditional Heteroskedasticity with Smoothly Time-Varying Structure
AbstractIn this paper, we propose two parametric alternatives to the standard GARCH model. They allow the conditional variance to have a smooth time-varying structure of either additive or multiplicative type. The suggested parameterizations describe both nonlinearity and structural change in the conditional and unconditional variances where the transition between regimes over time is smooth. A modelling strategy for these new time-varying parameter GARCH models is developed. It relies on a sequence of Lagrange multiplier tests, and the adequacy of the estimated models is investigated by Lagrange multiplier type misspecification tests. Finite-sample properties of these procedures and tests are examined by simulation. An empirical application to daily stock returns and another one to daily exchange rate returns illustrate the functioning and properties of our modelling strategy in practice. The results show that the long memory type behaviour of the sample autocorrelation functions of the absolute returns can also be explained by deterministic changes in the unconditional variance.
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Bibliographic InfoPaper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 691.
Length: 56 pages
Date of creation: 24 Jan 2008
Date of revision:
Publication status: Published as Amado, Cristina and Timo Teräsvirta, 'Modelling volatility by variance decomposition' in Journal of Econometrics, 2013, pages 142-153.
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More information through EDIRC
Conditional heteroskedasticity; Structural change; Lagrange multiplier test; Misspecification test; Nonlinear time series; Time-varying parameter model.;
Other versions of this item:
- Cristina Amado & Timo Teräsvirta, 2008. "Modelling Conditional and Unconditional Heteroskedasticity with Smoothly Time-Varying Structure," NIPE Working Papers 03/2008, NIPE - Universidade do Minho.
- Christina Amado & Timo Teräsvirta, 2008. "Modelling Conditional and Unconditional Heteroskedasticity with Smoothly Time-Varying Structure," CREATES Research Papers 2008-08, School of Economics and Management, University of Aarhus.
- C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-02-02 (All new papers)
- NEP-ECM-2008-02-02 (Econometrics)
- NEP-ETS-2008-02-02 (Econometric Time Series)
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