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Title:Modelling conditional and unconditional heteroskedasticity with smoothly time-varying structure PDF Logo
Authors:Amado, Cristina
Teräsvirta, Timo
Issue Date:2008
Series/Report no.:SSE/EFI Working Paper Series in Economics and Finance 691
Abstract:In this paper, we propose two parametric alternatives to the standard GARCH model. They allow the conditional variance to have a smooth time-varying structure of either additive or multiplicative type. The suggested parameterizations describe both nonlinearity and structural change in the conditional and unconditional variances where the transition between regimes over time is smooth. A modelling strategy for these new time-varying parameter GARCH models is developed. It relies on a sequence of Lagrange multiplier tests, and the adequacy of the estimated models is investigated by Lagrange multiplier type misspecification tests. Finite-sample properties of these procedures and tests are examined by simulation. An empirical application to daily stock returns and another one to daily exchange rate returns illustrate the functioning and properties of our modelling strategy in practice. The results show that the long memory type behaviour of the sample autocorrelation functions of the absolute returns can also be explained by deterministic changes in the unconditional variance.
Subjects:Conditional heteroskedasticity
Structural change
Lagrange multiplier test
Misspecification test
Nonlinear time series
Time-varying parameter model
JEL:C12
C22
C51
C52
Document Type:Working Paper
Appears in Collections:SSE/EFI Working Paper Series in Economics and Finance, EFI - The Economic Research Institute, Stockholm School of Economics

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