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Outlier robust specification of multiplicative time-varying volatility models

Author

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  • Cristina Amado

    (NIPE/Center for Research in Economics and Management, University of Minho, Portugal; and CREATES and Aarhus University)

Abstract

Nonstationarity and outlying observations are commonly encountered in financial time series. It is thus expected that models are able to accommodate these stylized facts and the techniques used are suitable to specify such models. In this paper we relax the assumption of stationarity and consider the problem of detecting smooth changes in the unconditional variance in the presence of outliers. It is found by simulation that the misspecifi cation test for constancy of the unconditional variance in GARCH models can be severely adversely affected in the presence of additive outliers. An outlier robust specifi cation procedure is also proposed to mitigate the effects of outliers for building multiplicative time-varying volatility models. The outlier robust variant of the test is shown to perform better than the conventional test in terms of size and power. An application to commodity returns illustrates the usefulness of the robust specifi cation procedure.

Suggested Citation

  • Cristina Amado, 2022. "Outlier robust specification of multiplicative time-varying volatility models," NIPE Working Papers 11/2022, NIPE - Universidade do Minho.
    • Handle: RePEc:nip:nipewp:11/2022
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    File URL: http://repositorium.sdum.uminho.pt/handle/1822/81323
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    More about this item

    Keywords

    Conditional heteroskedasticity; Testing parameter constancy; Model specification; Time-varying unconditional variance; Outliers.;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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