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The Effect of (Mis-Specified) GARCH Filters on the Finite Sample Distribution of the BDS Test

  • Brooks, Chris
  • Heravi, Saeed M

This paper considers the effect of using a GARCH filter on the properties of the BDS test statistic as well as a number of other issues relating to the application of the test. It is found that, for certain values of the user-adjustable parameters, the finite sample distribution of the test is far-removed from asymptotic normality. In particular, when data generated from some completely different model class are filtered through a GARCH model, the frequency of rejection of iid falls, often substantially. The implication of this result is that it might be inappropriate to use non-rejection of iid of the standardised residuals of a GARCH model as evidence that the GARCH model 'fits' the data. Citation Copyright 1999 by Kluwer Academic Publishers.

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Article provided by Society for Computational Economics in its journal Computational Economics.

Volume (Year): 13 (1999)
Issue (Month): 2 (April)
Pages: 147-62

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Handle: RePEc:kap:compec:v:13:y:1999:i:2:p:147-62
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