Arch model with Box-Cox transformed dependent variable

Nityananda Sarkar

Statistics & Probability Letters, 2000, vol. 50, issue 4, 365-374

Abstract: Box-Cox power transformation has been used traditionally to linearise otherwise nonlinear models. In this paper, Engle's linear ARCH specification is considered for a regression model in which the dependent variable is Box-Cox transformed. The consequent issues arising in both testing and estimation of the model are investigated. A Lagrange multiplier test is also developed to test Engle's linear ARCH model against this wider class of models. The usefulness of this generalisation is examined by applying it to the daily closing prices on the Bombay Stock Exchange Sensitive Index, and the findings strongly favour the proposed model.

Keywords: ARCH/GARCH; model; Box-Cox; ARCH; model; Box-Cox; (BC); transformation; Extended; BCGARCH; model; Extended; BC; transformation; Lagrange; multiplier; test (search for similar items in EconPapers)
Date: 2000
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