A Lagrange multiplier test for testing the adequacy of constant conditional correlation GARCH model

Paul Catani, Timo Teräsvirta and Meiqun Yin

Econometric Reviews, 2017, vol. 36, issue 6-9, 599-621

Abstract: A Lagrange multiplier test for testing the parametric structure of a constant conditional correlation-generalized autoregressive conditional heteroskedasticity (CCC-GARCH) model is proposed. The test is based on decomposing the CCC-GARCH model multiplicatively into two components, one of which represents the null model, whereas the other one describes the misspecification. A simulation study shows that the test has good finite sample properties. We compare the test with other tests for misspecification of multivariate GARCH models. The test has high power against alternatives where the misspecification is in the GARCH parameters and is superior to other tests. The test is not greatly affected by misspecification in the conditional correlations and is therefore well suited for considering misspecification of GARCH equations.

Date: 2017
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Working Paper: A Lagrange Multiplier Test for Testing the Adequacy of the Constant Conditional Correlation GARCH Model (2014)
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DOI: 10.1080/07474938.2017.1307311

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