GARCH Diagnosis with Portmanteau Bicorrelation Test: An Application on the Malaysia's Stock Market

Kian-Ping Lim, Melvin Hinich and Venus Liew

Finance from University Library of Munich, Germany

Abstract: This study employed the Hinich portmanteau bicorrelation test (Hinich and Patterson, 1995; Hinich, 1996) as a diagnostic tool to determine the adequacy of the GARCH model in describing the returns generating process of Malaysia’s stock market, specifically the Kuala Lumpur Stock Exchange Composite Index (KLSE CI). The bicorrelation results demonstrated that, while GARCH model is commonly applied to financial time series, this model cannot provide an adequate characterization for the underlying process of KLSE CI. Further investigation using the windowed test procedure revealed that this was due to the presence of episodic non- stationarity in the data, which could not be captured by any kind of ARCH or GARCH model, even after modifications to the specifications of the GARCH model. Thus, this study points to the need to continue the search for a parsimonious and congruent model capable of capturing the episodic features presence in the returns series of KLSE CI.

Keywords: GARCH; Non-linearity; Non-stationarity; Data generating process; Bicorrelation; Malaysian stock market. (search for similar items in EconPapers)
JEL-codes: G (search for similar items in EconPapers)
Date: 2003-07-23
New Economics Papers: this item is included in nep-cfn, nep-ets, nep-rmg and nep-sea
Note: Type of Document - pdf
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpfi:0307013

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