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Short Patches of Outliers, ARCH and Volatility Modeling

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  • Philip Hans Franses

    ()

  • Dick van Dijk

    () (Erasmus University Rotterdam)

  • André Lucas

    () (Vrije Universiteit Amsterdam)

Abstract

In this paper we test for (Generalized) AutoRegressive Conditional Heteroskedasticity [(G)ARCH] in daily data on 22 exchange rates and 13 stock market indices using the standard Lagrange Multiplier [LM] test for GARCH and a LM test that is resistant to patches of additive outliers. The data span two samples of 5 years ranging from 1986 to 1995. Using asymptotic arguments and Monte Carlo simulations, in which we evaluate our empirical method, we show that patches of outliers can have significant effects on test outcomes. Our main empirical result is that we find spurious GARCH in about 40% of the cases, while in many other cases we find evidence of GARCH even though such sequences of extraordinary observations seem to be present.

Suggested Citation

  • Philip Hans Franses & Dick van Dijk & André Lucas, 1998. "Short Patches of Outliers, ARCH and Volatility Modeling," Tinbergen Institute Discussion Papers 98-057/4, Tinbergen Institute.
  • Handle: RePEc:tin:wpaper:19980057
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    References listed on IDEAS

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    1. Lee, John H. H., 1991. "A Lagrange multiplier test for GARCH models," Economics Letters, Elsevier, vol. 37(3), pages 265-271, November.
    2. van Dijk, Dick & Franses, Philip Hans & Lucas, Andre, 1999. "Testing for ARCH in the Presence of Additive Outliers," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(5), pages 539-562, Sept.-Oct.
    3. Baillie, Richard T & Bollerslev, Tim, 2002. "The Message in Daily Exchange Rates: A Conditional-Variance Tale," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 60-68, January.
    4. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
    5. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59.
    6. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
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    Citations

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    Cited by:

    1. Amado Peiró, 2016. "Changes in the Unconditional Variance and Autoregressive Conditional Heteroscedasticity," International Journal of Economics and Financial Issues, Econjournals, vol. 6(4), pages 1338-1343.
    2. Ruiz, Esther & Peña, Daniel & Carnero, María Ángeles, 2004. "Spurious and hidden volatility," DES - Working Papers. Statistics and Econometrics. WS ws042007, Universidad Carlos III de Madrid. Departamento de Estadística.
    3. F. Javier Trivez & Beatriz Catalan, 2009. "Detecting level shifts in ARMA-GARCH (1,1) Models," Journal of Applied Statistics, Taylor & Francis Journals, vol. 36(6), pages 679-697.
    4. LeBaron, Blake, 2003. "Non-Linear Time Series Models in Empirical Finance,: Philip Hans Franses and Dick van Dijk, Cambridge University Press, Cambridge, 2000, 296 pp., Paperback, ISBN 0-521-77965-0, $33, [UK pound]22.95, [," International Journal of Forecasting, Elsevier, vol. 19(4), pages 751-752.
    5. Franses,Philip Hans & Dijk,Dick van, 2000. "Non-Linear Time Series Models in Empirical Finance," Cambridge Books, Cambridge University Press, number 9780521779654.
    6. Yu Hsing, 2007. "Analysis of exchange rate fluctuations in Estonia: test of the interest parity condition and the open economy model," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 3(1), pages 51-54, January.
    7. Lanne, Markku & Saikkonen, Pentti, 2007. "A Multivariate Generalized Orthogonal Factor GARCH Model," Journal of Business & Economic Statistics, American Statistical Association, vol. 25, pages 61-75, January.
    8. repec:spr:annopr:v:262:y:2018:i:2:d:10.1007_s10479-015-2078-z is not listed on IDEAS
    9. Beatriz Catalan & F. Javier Trivez, 2007. "Forecasting volatility in GARCH models with additive outliers," Quantitative Finance, Taylor & Francis Journals, vol. 7(6), pages 591-596.
    10. Jose Luis Miralles-Marcelo & Jose Luis Miralles-Quiros & Maria del Mar Miralles-Quiros, 2010. "Intraday linkages between the Spanish and the US stock markets: evidence of an overreaction effect," Applied Economics, Taylor & Francis Journals, vol. 42(2), pages 223-235.
    11. Miralles-Quirós, José Luis & Daza-Izquierdo, Julio, 2015. "Do DOW returns really influence the intraday Spanish stock market behavior?," Research in International Business and Finance, Elsevier, vol. 33(C), pages 99-126.
    12. Grossi, Luigi & Laurini, Fabrizio, 2009. "A robust forward weighted Lagrange multiplier test for conditional heteroscedasticity," Computational Statistics & Data Analysis, Elsevier, vol. 53(6), pages 2251-2263, April.
    13. Kyrtsou, Catherine & Malliaris, Anastasios G., 2009. "The impact of information signals on market prices when agents have non-linear trading rules," Economic Modelling, Elsevier, vol. 26(1), pages 167-176, January.
    14. Juncal Cunado Eizaguirre & Javier Gomez Biscarri & Fernando Perez de Gracia Hidalgo, 2009. "Financial liberalization, stock market volatility and outliers in emerging economies," Applied Financial Economics, Taylor & Francis Journals, vol. 19(10), pages 809-823.

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