Influence Diagnostics in GARCH Processes
Influence diagnostics have become an important tool for statistical analysis since the seminal work by Cook (1986). In this paper we present a curvature-based diagnostic to access local influence of minor perturbations on the modified likelihood displacement in a regression model. Using the proposed diagnostic, we study the local influence in the GARCH model under two perturbation schemes which involve, respectively, model perturbation and data perturbation. We find that the curvature-based diagnostic often provides more information on the local influence being examined than the slope-based diagnostic, especially when the GARCH model is under investigation. An empirical study involving GARCH modeling of the percentage daily returns of the NYSE composite index illustrates the effectiveness of the proposed diagnostic and shows that the curvature-based diagnostic may provide information that cannot be uncovered by the slope-based diagnostic. We find that the effect or influence of each observation is not invariant across different perturbation schemes, thus it is advisable to study the local influence under different perturbation schemes through curvature-based diagnostics.
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