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Arch model with Box-Cox transformed dependent variable

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  • Sarkar, Nityananda

Abstract

Box-Cox power transformation has been used traditionally to linearise otherwise nonlinear models. In this paper, Engle's linear ARCH specification is considered for a regression model in which the dependent variable is Box-Cox transformed. The consequent issues arising in both testing and estimation of the model are investigated. A Lagrange multiplier test is also developed to test Engle's linear ARCH model against this wider class of models. The usefulness of this generalisation is examined by applying it to the daily closing prices on the Bombay Stock Exchange Sensitive Index, and the findings strongly favour the proposed model.

Suggested Citation

  • Sarkar, Nityananda, 2000. "Arch model with Box-Cox transformed dependent variable," Statistics & Probability Letters, Elsevier, vol. 50(4), pages 365-374, December.
  • Handle: RePEc:eee:stapro:v:50:y:2000:i:4:p:365-374
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    References listed on IDEAS

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    1. Hentschel, Ludger, 1995. "All in the family Nesting symmetric and asymmetric GARCH models," Journal of Financial Economics, Elsevier, vol. 39(1), pages 71-104, September.
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    8. Ernst R. Berndt & Bronwyn H. Hall & Robert E. Hall & Jerry A. Hausman, 1974. "Estimation and Inference in Nonlinear Structural Models," NBER Chapters,in: Annals of Economic and Social Measurement, Volume 3, number 4, pages 653-665 National Bureau of Economic Research, Inc.
    9. Russell Davidson & James G. MacKinnon, 1985. "Testing Linear and Loglinear Regressions against Box-Cox Alternatives," Canadian Journal of Economics, Canadian Economics Association, vol. 18(3), pages 499-517, August.
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    11. anonymous, 1986. "Extension of period for comment," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Mar, pages 194-194.
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