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A Score Test for Discreteness in GARCH Models

  • Henrik Amilon
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    The standard continuous-state GARCH model is misspecified if applied to returns calculated from discrete price series. We propose a modiÞcation of the above model for handling such cases, by modeling the dependent variable as an unobservable stochastic variable with certain observed outcomes. We further construct a score test that can be used to check if the proposed model differ significantly from the one we would have if all variables were observed, i.e. an underlying latent GARCH model. Using price data from some Australian stocks with high tick size to price ratios, we find the important result that in no case does the proposed model differ significantly from an unobservable continuous-state GARCH model.

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    Paper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 76.

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    Length: 19 pages
    Date of creation: 01 Mar 2002
    Date of revision:
    Handle: RePEc:uts:rpaper:76
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    5. repec:att:wimass:9520 is not listed on IDEAS
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    12. Szpiro, George G., 1998. "Tick size, the compass rose and market nanostructure," Journal of Banking & Finance, Elsevier, vol. 22(12), pages 1559-1569, December.
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