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First order asymptotic theory for parametric misspecification tests of GARCH models

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  • Andreea Halunga
  • Chris D. Orme

Abstract

This paper develops a framework for the construction and analysis of parametric misspecification tests for generalized autoregressive conditional heteroskedastic (GARCH) models, based on first-order asymptotic theory. The principal finding is that estimation effects from the correct specification of the conditional mean (regression) function can be asymptotically nonnegligible. This implies that certain procedures, such as the asymmetry tests of Engle and Ng (1993, Journal of Finance 48, 1749–1777) and the nonlinearity test of Lundbergh and Teräsvirta (2002, Journal of Econometrics 110, 417–435), are asymptotically invalid. A second contribution is the proposed use of alternative tests for asymmetry and/or nonlinearity that, it is conjectured, should enjoy improved power properties. A Monte Carlo study supports the principal theoretical findings and also suggests that the new tests have fairly good size and very good power properties when compared with the Engle and Ng (1993) and Lundbergh and Teräsvirta (2002) procedures.
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Suggested Citation

  • Andreea Halunga & Chris D. Orme, 2007. "First order asymptotic theory for parametric misspecification tests of GARCH models," The School of Economics Discussion Paper Series 0721, Economics, The University of Manchester.
  • Handle: RePEc:man:sespap:0721
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    References listed on IDEAS

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    Cited by:

    1. Andreou, Elena & Werker, Bas J.M., 2015. "Residual-based rank specification tests for AR–GARCH type models," Journal of Econometrics, Elsevier, vol. 185(2), pages 305-331.
    2. Wasel Shadat, 2011. "On the Nonparametric Tests of Univariate GARCH Regression Models," The School of Economics Discussion Paper Series 1115, Economics, The University of Manchester.
    3. Elena Andreou & Bas J.M. Werker, 2014. "Residual-based Rank Specification Tests for AR-GARCH type models," University of Cyprus Working Papers in Economics 02-2014, University of Cyprus Department of Economics.
    4. Conrad, Christian & Schienle, Melanie, 2015. "Misspecification Testing in GARCH-MIDAS Models," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112919, Verein für Socialpolitik / German Economic Association.
    5. Andreou, Elena & Werker, Bas J M, 2013. "Residual-based Rank Specification Tests for AR-GARCH type models," CEPR Discussion Papers 9583, C.E.P.R. Discussion Papers.
    6. Wasel Shadat & Chris Orme, 2011. "An investigation of parametric tests of CCC assumption," The School of Economics Discussion Paper Series 1109, Economics, The University of Manchester.
    7. Nektarios Aslanidis & Denise R. Osborn & Marianne Sensier, 2008. "Co-movements between US and UK stock prices: the roles of macroeconomic information and time-varying conditional correlations," Centre for Growth and Business Cycle Research Discussion Paper Series 96, Economics, The Univeristy of Manchester.
    8. Conrad, Christian & Schienle, Melanie, 2015. "Misspecification Testing in GARCH-MIDAS Models," Working Papers 0597, University of Heidelberg, Department of Economics.

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