Testing for an omitted multiplicative long-term component in GARCH models

Christian Conrad and Melanie Schienle

No 121, Working Paper Series in Economics from Karlsruhe Institute of Technology (KIT), Department of Economics and Management

Abstract: We consider the problem of testing for an omitted multiplicative long-term component in GARCH-type models. Under the alternative there is a two-component model with a short-term GARCH component that fluctuates around a smoothly time-varying long-term component which is driven by the dynamics of an explanatory variable. We suggest a Lagrange Multiplier statistic for testing the null hypothesis that the variable has no explanatory power. We derive the asymptotic theory for our test statistic and investigate its finite sample properties by Monte-Carlo simulation. Our test also covers the mixed-frequency case in which the returns are observed at a higher frequency than the explanatory variable. The usefulness of our procedure is illustrated by empirical applications to S&P 500 return data.

Keywords: GARCH-MIDAS; LM test; Long-Term Volatility; Mixed-Frequency Data; Volatility Component Models (search for similar items in EconPapers)
JEL-codes: C53 C58 E32 G12 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-mac
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Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Testing for an Omitted Multiplicative Long-Term Component in GARCH Models (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:kitwps:121

DOI: 10.5445/IR/1000090371

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