A simple test for GARCH against a stochastic volatility

Philip Hans Franses, Marco van der Leij and Richard Paap

No EI 2005-41, Econometric Institute Research Papers from Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute

Abstract: The GARCH model and the Stochastic Volatility [SV] model are competing but non-nested models to describe unobserved volatility in asset returns. We propose a GARCH model with an additional error term, which can capture SV model properties, and which can be used to test GARCH against SV. We discuss model representation, parameter estimation and a simple test for model selection. Furthermore, we derive the theoretical moments and the autocorrelation function of our new model. We illustrate its merits for 9 daily stock return series.

Keywords: GARCH; model selection; stochastic volatility (search for similar items in EconPapers)
Date: 2005-01-01
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