Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/127414 
Year of Publication: 
2015
Series/Report no.: 
Discussion Paper Series No. 597
Publisher: 
University of Heidelberg, Department of Economics, Heidelberg
Abstract: 
We develop a misspecification test for the multiplicative two-component GARCH-MIDAS model suggested in Engle et al. (2013). In the GARCH-MIDAS model a short-term unit variance GARCH component 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. Hence, under the null hypothesis the long-term component is constant and the GARCH-MIDAS reduces to the simple GARCH model. We derive the asymptotic theory for our test statistic and investigate its finite sample properties by Monte-Carlo simulation. The usefulness of our procedure is illustrated by an empirical application to S&P 500 return data.
Subjects: 
Volatility Component Models
LM test
Long-term Volatility
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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