Testing constancy of unconditional variance in volatility models by misspecification and specification tests

Annastiina Silvennoinen and Timo Teräsvirta

No 108, NCER Working Paper Series from National Centre for Econometric Research

Abstract: The topic of this paper is testing the hypothesis of constant unconditional variance in GARCH models against the alternative that the unconditional variance changes deterministically over time. Tests of this hypothesis have previously been performed as misspecification tests after fitting a GARCH model to the original series. It is found by simulation that the positive size distortion present in these tests is a function of the kurtosis of the GARCH process. Adjusting the size by numerical methods is considered. The possibility of testing the constancy of the unconditional variance before fitting a GARCH model to the data is discussed. The power of the ensuing test is vastly superior to that of the misspecification test and the size distortion minimal. The test has reasonable power already in very short time series. It would thus serve as a test of constant variance in conditional mean models. An application to exchange rate returns is included.

Keywords: autoregressive conditional heteroskedasticity; modelling volatility; testing parameter constancy; time-varying GARCH (search for similar items in EconPapers)
JEL-codes: C32 C52 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2015-10-28
New Economics Papers: this item is included in nep-ecm and nep-ets
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Related works:
Journal Article: Testing constancy of unconditional variance in volatility models by misspecification and specification tests (2016)
Working Paper: Testing constancy of unconditional variance in volatility models by misspecification and specification tests (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:qut:auncer:2015_06

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