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Influence Diagnostics in GARCH Processes

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Listed:
  • Xibin Zhang
  • Maxwell L. King

Abstract

Influence diagnostics have become an important tool for statistical analysis since the seminal work by Cook (1986). In this paper we present a curvature-based diagnostic to access local influence of minor perturbations on the modified likelihood displacement in a regression model. Using the proposed diagnostic, we study the local influence in the GARCH model under two perturbation schemes which involve, respectively, model perturbation and data perturbation. We find that the curvature-based diagnostic often provides more information on the local influence being examined than the slope-based diagnostic, especially when the GARCH model is under investigation. An empirical study involving GARCH modeling of the percentage daily returns of the NYSE composite index illustrates the effectiveness of the proposed diagnostic and shows that the curvature-based diagnostic may provide information that cannot be uncovered by the slope-based diagnostic. We find that the effect or influence of each observation is not invariant across different perturbation schemes, thus it is advisable to study the local influence under different perturbation schemes through curvature-based diagnostics.

Suggested Citation

  • Xibin Zhang & Maxwell L. King, 2002. "Influence Diagnostics in GARCH Processes," Monash Econometrics and Business Statistics Working Papers 19/02, Monash University, Department of Econometrics and Business Statistics.
    • Handle: RePEc:msh:ebswps:2002-19
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    File URL: http://www.buseco.monash.edu.au/ebs/pubs/wpapers/2002/wp19-02.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Normal curvature; modified likelihood displacement; GARCH models.;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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