Nuisance parameters, composite likelihoods and a panel of GARCH models

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Nuisance parameters, composite likelihoods and a panel of GARCH models

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Cavait Pakel
Neil Shephard
Kevin Sheppard

Abstract

We investigate the properties of the composite likelihood (CL) method for (T x NT) GARCH panels. The defining feature of a GARCH panel with time series length T is that, while nuisance parameters are allowed to vary across NT series, other parameters of interest are assumed to be common. CL pools information across the panel instead of using information available in a single series only. Simulations and empirical analysis illustate that in reasonably large T CL performs well. However, due to the estimation error introduced through nuisance parameter estimation, CL is subject to the “incidental parameter” problem for small T.

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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 458.

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Date of creation: 2009
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Handle: RePEc:oxf:wpaper:458

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Find related papers by JEL classification:
C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Semiparametric and Nonparametric Methods
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions

This paper has been announced in the following NEP Reports:

NEP-ALL-2009-10-24 (All new papers)
NEP-ECM-2009-10-24 (Econometrics)
NEP-ETS-2009-10-24 (Econometric Time Series)
NEP-ORE-2009-10-24 (Operations Research)

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