A Score Test for Discreteness in GARCH Models

Henrik Amilon

No 76, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: The standard continuous-state GARCH model is misspecified if applied to returns calculated from discrete price series. We propose a modiÞcation of the above model for handling such cases, by modeling the dependent variable as an unobservable stochastic variable with certain observed outcomes. We further construct a score test that can be used to check if the proposed model differ significantly from the one we would have if all variables were observed, i.e. an underlying latent GARCH model. Using price data from some Australian stocks with high tick size to price ratios, we find the important result that in no case does the proposed model differ significantly from an unobservable continuous-state GARCH model.

Keywords: GARCH; latent variables; generalized residuals; score test (search for similar items in EconPapers)
JEL-codes: C22 C24 C51 C52 (search for similar items in EconPapers)
Pages: 19 pages
Date: 2002-03-01
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