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TESTING GARCH-X TYPE MODELS

Rasmus Soendergaard Pedersen and Anders Rahbek
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Rasmus Soendergaard Pedersen: Department of Economics, University of Copenhagen
Anders Rahbek: Department of Economics, University of Copenhagen

No 17-15, Discussion Papers from University of Copenhagen. Department of Economics

Abstract: We present novel theory for testing for reduction of GARCH-X type models with an exogenous (X) covariate to standard GARCH type models. To deal with the problems of potential nuisance parameters on the boundary of the parameter space as well as lack of identi?cation under the null, we exploit a noticeable property of speci?fic zero-entries in the inverse information of the GARCH-X type models. Speci?cally, we consider sequential testing based on two likelihood ratio tests and as demonstrated the structure of the inverse information implies that the proposed test neither depends on whether the nuisance parameters lie on the boundary of the parameter space, nor on lack of identi?cation. Our general results on GARCH-X type models are applied to Gaussian based GARCH-X models, GARCH-X models with Student'?s t-distributed innovations as well as the integer-valued GARCH-X (PAR-X) models.

Keywords: Testing on the boundary; Likelihood-ratio test; Non-identi?cation; GARCH-X; PAR-X; GARCH models; Integer-valued (search for similar items in EconPapers)
JEL-codes: C32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm
Date: 2017-08-23
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