A Simple Test for GARCH Against a Stochastic Volatility Model

Philip Hans Franses, Marco van der Leij and Richard Paap

Journal of Financial Econometrics, 2008, vol. 6, issue 3, 291-306

Abstract: GARCH models and Stochastic Volatility (SV) models can both be used to describe unobserved volatility in asset returns. We consider the issue of testing a GARCH model against an SV model. For that purpose, we propose a new and parsimonious GARCH-t model with an additional restricted moving average term, which can capture SV model properties. We discuss model representation, parameter estimation, and our simple test for model selection. Furthermore, we derive the theoretical moments and the autocorrelation function of our new model. We illustrate our model and test for nine daily stock-return series. Copyright The Author 2008. Published by Oxford University Press. All rights reserved. For permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

Date: 2008
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