Testing for misspecification in the short-run component of GARCH-type models

Thomas Chuffart, Emmanuel Flachaire and Anne Peguin-Feissolle
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Anne Peguin-Feissolle: GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique, AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique

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Abstract: In this article, a misspecification test in conditional volatility and GARCH-type models is presented. We propose a Lagrange Multiplier type test based on a Taylor expansion to distinguish between (G)ARCH models and unknown GARCH-type models. This new test can be seen as a general misspecification test of a large set of GARCH-type univariate models. It focuses on the short-term component of the volatility. We investigate the size and the power of this test through Monte Carlo experiments and we compare it to two other standard Lagrange Multiplier tests, which are more restrictive. We show the usefulness of our test with an illustrative empirical example based on daily exchange rate returns.

Date: 2018-12-19
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Published in Studies in Nonlinear Dynamics and Econometrics, 2018, 22 (5), ⟨10.1515/snde-2017-0069⟩

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Related works:
Journal Article: Testing for misspecification in the short-run component of GARCH-type models (2018)
Working Paper: Testing for misspecification in the short-run component of GARCH-type models (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-02083772

DOI: 10.1515/snde-2017-0069

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