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Spurious And Hidden Volatility

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Author Info
M. Angeles Carnero () (Universidad de Alicante)
Daniel Peña () (Universidad Carlos III de Madrid)
Esther Ruiz () (Universidad Carlos III de Madrid)

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Abstract

This paper analyzes the effects caused by outliers on the identification and estimation of GARCH models. We show that outliers can lead to detect spurious conditional heteroscedasticity and can also hide genuine ARCH effects. First, we derive the asymptotic biases caused by outliers on the sample autocorrelations of squared observations and their effects on some homoscedasticity tests. Then, we obtain the asymptotic biases of the OLS estimates of ARCH(p) models and analyze their finite sample behaviour by means of extensive Monte Carlo experiments. The finite sample results are extended to GLS and ML estimates ARCH(p) and GARCH(1,1) models.

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File URL: http://www.ivie.es/downloads/docs/wpasad/wpasad-2004-45.pdf
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Publisher Info
Paper provided by Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) in its series Working Papers. Serie AD with number 2004-45.

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Length: 44 pages
Date of creation: Nov 2004
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Publication status: Published by Ivie
Handle: RePEc:ivi:wpasad:2004-45

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Related research
Keywords: GARCH; Outliers; Heteroscedasticity;

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Find related papers by JEL classification:
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Pena D. & Rodriguez J., 2002. "A Powerful Portmanteau Test of Lack of Fit for Time Series," Journal of the American Statistical Association, American Statistical Association, vol. 97, pages 601-610, June. [Downloadable!] (restricted)
  2. Franses, Philip Hans & Ghijsels, Hendrik, 1999. "Additive outliers, GARCH and forecasting volatility," International Journal of Forecasting, Elsevier, vol. 15(1), pages 1-9, February. [Downloadable!] (restricted)
  3. Ling, Shiqing & McAleer, Michael, 2003. "Asymptotic Theory For A Vector Arma-Garch Model," Econometric Theory, Cambridge University Press, vol. 19(02), pages 280-310, April. [Downloadable!]
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  4. Arup Bose & Kanchan Mukherjee, 2003. "Estimating The Arch Parameters By Solving Linear Equations," Journal of Time Series Analysis, Blackwell Publishing, vol. 24(2), pages 127-136, 03. [Downloadable!] (restricted)
  5. Balke, Nathan S & Fomby, Thomas B, 1994. "Large Shocks, Small Shocks, and Economic Fluctuations: Outliers in Macroeconomic Time Series," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 9(2), pages 181-200, April-Jun. [Downloadable!] (restricted)
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  6. Xibin Zhang, 2004. "Assessment of Local Influence in GARCH Processes," Journal of Time Series Analysis, Blackwell Publishing, vol. 25(2), pages 301-313, 03. [Downloadable!] (restricted)
  7. Philip Hans Franses & Dick van Dijk & André Lucas, 2004. "Short patches of outliers, ARCH and volatility modelling," Applied Financial Economics, Taylor and Francis Journals, vol. 14(4), pages 221-231, January. [Downloadable!] (restricted)
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  8. Wooldridge, Jeffrey M., 1990. "A Unified Approach to Robust, Regression-Based Specification Tests," Econometric Theory, Cambridge University Press, vol. 6(01), pages 17-43, March. [Downloadable!]
  9. Aggarwal, Reena & Inclan, Carla & Leal, Ricardo, 1999. "Volatility in Emerging Stock Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(01), pages 33-55, March. [Downloadable!]
  10. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April. [Downloadable!] (restricted)
  11. van Dijk, Dick & Franses, Philip Hans & Lucas, Andre, 1999. "Testing for ARCH in the Presence of Additive Outliers," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(5), pages 539-62, Sept.-Oct. [Downloadable!]
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