Misspecification Testing in GARCH-MIDAS Models

Christian Conrad and Melanie Schienle

No 597, Working Papers from University of Heidelberg, Department of Economics

Abstract: We develop a misspecification test for the multiplicative two-component GARCH-MIDAS model suggested in Engle et al. (2013). In the GARCH-MIDAS model a short-term unit variance GARCH component fluctuates around a smoothly time-varying long-term component which is driven by the dynamics of an explanatory variable. We suggest a Lagrange Multiplier statistic for testing the null hypothesis that the variable has no explanatory power. Hence, under the null hypothesis the long-term component is constant and the GARCH-MIDAS reduces to the simple GARCH model. We derive the asymptotic theory for our test statistic and investigate its finite sample properties by Monte-Carlo simulation. The usefulness of our procedure is illustrated by an empirical application to S&P 500 return data.

Keywords: Volatility Component Models; LM test; Long-term Volatility. (search for similar items in EconPapers)
Date: 2015-07-09
New Economics Papers: this item is included in nep-ecm and nep-ets
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