Correcting outliers in GARCH models: a weighted forward approach

Lisa Crosato () and Luigi Grossi

Statistical Papers, 2019, vol. 60, issue 6, No 6, 1939-1970

Abstract: Abstract In this paper we develop a weighted forward search (WFS) approach to the correction of outliers in GARCH(1,1) models relying on the foward search (FS) method introduced by Atkinson and Riani (Robust diagnostic regression analysis. Springer, New York, 2000). The WFS is based on a weighting system of each unit and is an extension of the FS from independent to dependent observations. We propose a WFS test for the detection of outliers in GARCH(1,1) models and a WFS estimator of GARCH(1,1) coefficients which automatically corrects outliers. Extensive Monte Carlo simulations show the good performance of the WFS test with respect to other methods of outlier detection for the same models. The marked similarity between the distribution of MLE before strong contamination of the time series and after decontamination through the WFS proves the reliability of the WFS estimator. Finally, the application of the WFS procedure to several financial time series of the NYSE reveals the effectiveness of the method when extreme returns are observed.

Keywords: Extreme observations; GARCH models; Outliers; Robust statistics; Weighted forward search (search for similar items in EconPapers)
JEL-codes: C13 C15 C58 C63 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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DOI: 10.1007/s00362-017-0903-y

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