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Spurious And Hidden Volatility

Author

Listed:
  • M. Angeles Carnero

    () (Universidad de Alicante)

  • Daniel Peña

    () (Universidad Carlos III de Madrid)

  • Esther Ruiz

    () (Universidad Carlos III de Madrid)

Abstract

This paper analyzes the effects caused by outliers on the identification and estimation of GARCH models. We show that outliers can lead to detect spurious conditional heteroscedasticity and can also hide genuine ARCH effects. First, we derive the asymptotic biases caused by outliers on the sample autocorrelations of squared observations and their effects on some homoscedasticity tests. Then, we obtain the asymptotic biases of the OLS estimates of ARCH(p) models and analyze their finite sample behaviour by means of extensive Monte Carlo experiments. The finite sample results are extended to GLS and ML estimates ARCH(p) and GARCH(1,1) models.

Suggested Citation

  • M. Angeles Carnero & Daniel Peña & Esther Ruiz, 2004. "Spurious And Hidden Volatility," Working Papers. Serie AD 2004-45, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  • Handle: RePEc:ivi:wpasad:2004-45
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    References listed on IDEAS

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    2. Aggarwal, Reena & Inclan, Carla & Leal, Ricardo, 1999. "Volatility in Emerging Stock Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(01), pages 33-55, March.
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    4. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
    5. Benjamin M. Friedman & David I. Laibson, 1989. "Economic Implications of Extraordinary Movements in Stock Prices," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 20(2), pages 137-190.
    6. Balke, Nathan S & Fomby, Thomas B, 1994. "Large Shocks, Small Shocks, and Economic Fluctuations: Outliers in Macroeconomic Time Series," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 9(2), pages 181-200, April-Jun.
    7. Allan W. Gregory & Jonathan J. Reeves, 2010. "Estimation and Inference in ARCH Models in the Presence of Outliers," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 8(4), pages 547-549, Fall.
    8. Philip Hans Franses & Dick van Dijk & Andre Lucas, 2004. "Short patches of outliers, ARCH and volatility modelling," Applied Financial Economics, Taylor & Francis Journals, vol. 14(4), pages 221-231.
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    11. Arup Bose & Kanchan Mukherjee, 2003. "Estimating The Arch Parameters By Solving Linear Equations," Journal of Time Series Analysis, Wiley Blackwell, vol. 24(2), pages 127-136, March.
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    Cited by:

    1. 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.
    2. Pascual, Lorenzo & Romo, Juan & Ruiz, Esther, 2006. "Bootstrap prediction for returns and volatilities in GARCH models," Computational Statistics & Data Analysis, Elsevier, vol. 50(9), pages 2293-2312, May.

    More about this item

    Keywords

    GARCH; Outliers; Heteroscedasticity;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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