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Testing For Parameter Instability In Garch Models

Author

Listed:
  • Guillermo Llorente

    (Universidad Autnoma de Madrid)

  • J. del Hoyo

    (Universidad Autnoma de Madrid)

Abstract

This papers proposes a two-step procedure for testing for constant parameters in GARCH models using recursive tests. We test the stability of the parameters conditional on consistent estimates obtained with the full sample. In the first step, we identify and estimate the best GARCH model using the full sample. In the second, using the first-step results and noting that the conditional variance is consistent under the null of constant parameters, recursive statistics are used to test for parameter constancy. The tests are applied to the S&P 500 stock index and to series of the exchange rates of the dollar for the mark, pound, and yen.

Suggested Citation

  • Guillermo Llorente & J. del Hoyo, 2000. "Testing For Parameter Instability In Garch Models," Computing in Economics and Finance 2000 158, Society for Computational Economics.
    • Handle: RePEc:sce:scecf0:158
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