GEL estimation for heavy-tailed GARCH models with robust empirical likelihood inference

Jonathan B. Hill and Artem Prokhorov

Journal of Econometrics, 2016, vol. 190, issue 1, 18-45

Abstract: We construct a Generalized Empirical Likelihood estimator for a GARCH(1, 1) model with a possibly heavy tailed error. The estimator imbeds tail-trimmed estimating equations allowing for over-identifying conditions, asymptotic normality, efficiency and empirical likelihood based confidence regions for very heavy-tailed random volatility data. We show the implied probabilities from the tail-trimmed Continuously Updated Estimator elevate weight for usable large values, assign large but not maximum weight to extreme observations, and give the lowest weight to non-leverage points. We derive a higher order expansion for GEL with imbedded tail-trimming (GELITT), which reveals higher order bias and efficiency properties, available when the GARCH error has a finite second moment. Higher order asymptotics for GEL without tail-trimming requires the error to have moments of substantially higher order. We use first order asymptotics and higher order bias to justify the choice of the number of trimmed observations in any given sample. We also present robust versions of Generalized Empirical Likelihood Ratio, Wald, and Lagrange Multiplier tests, and an efficient and heavy tail robust moment estimator with an application to expected shortfall estimation. Finally, we present a broad simulation study for GEL and GELITT, and demonstrate profile weighted expected shortfall for the Russian Ruble–US Dollar exchange rate. We show that tail-trimmed CUE-GMM dominates other estimators in terms of bias, mse and approximate normality.

Keywords: GEL; GARCH; Tail trimming; Heavy tails; Robust inference; Efficient moment estimation; Expected shortfall; Russian Ruble (search for similar items in EconPapers)
JEL-codes: C13 C49 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:190:y:2016:i:1:p:18-45

DOI: 10.1016/j.jeconom.2015.09.001

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