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Outliers and conditional autoregressive heteroscedasticity in time series

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  • Carnero, María Ángeles
  • Peña, Daniel
  • Ruiz, Esther

Abstract

This paper reviews the literature on GARCH-type models proposed to represent the dynamic evolution of conditional variances. Effects of level outliers on the diagnostic and estimation of GARCH models are also studied. Both outliers and conditional heteroscedasticity can generate time series with excess kurtosis and autocorrelated squared observations. Consequently, both phenomena can be confused. However, since outliers are generated by unexpected events and the conditional variances are predictable, it is important to identify which one is producing the observed features in the data. We compare two alternative procedures for dealing with the simultaneous presence of outliers and conditional heteroscedasticity in time series. The first one is to clean the series of outliers before fitting a GARCH model. The second is to estimate first the GARCH model and then to clean of outliers by using the residuals adjusted by its conditional variance. It is shown that both approaches may result in different estimated conditional variances.

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  • Carnero, María Ángeles & Peña, Daniel & Ruiz, Esther, 2001. "Outliers and conditional autoregressive heteroscedasticity in time series," DES - Working Papers. Statistics and Econometrics. WS ws010704, Universidad Carlos III de Madrid. Departamento de Estadística.
  • Handle: RePEc:cte:wsrepe:ws010704
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    Cited by:

    1. Charles, Amélie & Darné, Olivier, 2014. "Volatility persistence in crude oil markets," Energy Policy, Elsevier, vol. 65(C), pages 729-742.
    2. Carnero, María Ángeles & Peña, Daniel & Ruiz, Esther, 2003. "Detecting level shifts in the presence of conditional heteroscedasticity," DES - Working Papers. Statistics and Econometrics. WS ws036313, Universidad Carlos III de Madrid. Departamento de Estadística.
    3. Behmiri, Niaz Bashiri & Manera, Matteo, 2015. "The role of outliers and oil price shocks on volatility of metal prices," Resources Policy, Elsevier, vol. 46(P2), pages 139-150.
    4. Amélie Charles & Olivier Darné & Laurent Ferrara, 2014. "Does the Great Recession imply the end of the Great Moderation? International evidence," EconomiX Working Papers 2014-21, University of Paris Nanterre, EconomiX.
    5. Charles, Amélie & Darné, Olivier, 2014. "Large shocks in the volatility of the Dow Jones Industrial Average index: 1928–2013," Journal of Banking & Finance, Elsevier, vol. 43(C), pages 188-199.
    6. Beum-Jo Park, 2009. "Risk-return relationship in equity markets: using a robust GMM estimator for GARCH-M models," Quantitative Finance, Taylor & Francis Journals, vol. 9(1), pages 93-104.
    7. Charles, Amélie & Darné, Olivier & Pop, Adrian, 2015. "Risk and ethical investment: Empirical evidence from Dow Jones Islamic indexes," Research in International Business and Finance, Elsevier, vol. 35(C), pages 33-56.
    8. Charles, Amelie & Darne, Olivier, 2005. "Outliers and GARCH models in financial data," Economics Letters, Elsevier, vol. 86(3), pages 347-352, March.
    9. Charles, Amelie & Darne, Olivier, 2006. "Large shocks and the September 11th terrorist attacks on international stock markets," Economic Modelling, Elsevier, vol. 23(4), pages 683-698, July.
    10. Olivier Darné & Amélie Charles, 2011. "Large shocks in U.S. macroeconomic time series: 1860-1988," Cliometrica, Journal of Historical Economics and Econometric History, Association Française de Cliométrie (AFC), vol. 5(1), pages 79-100, January.
    11. Amélie Charles & Olivier Darné & Laurent Ferrara, 2018. "Does the Great Recession imply the end of the Great Moderation? International evidence," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-01757081, HAL.
    12. repec:eee:eneeco:v:67:y:2017:i:c:p:508-519 is not listed on IDEAS
    13. Maixé-Altés, J. Carles & Iglesias, Emma M., 2009. "Domestic monetary transfers and the inland bill of exchange markets in Spain (1775-1885)," Journal of International Money and Finance, Elsevier, vol. 28(3), pages 496-521, April.

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