cemmap working paper, Centre for Microdata Methods and Practice CWP11/13
We investigate a model in which we connect slowly time varying unconditional long-run volatility with short-run conditional volatility whose representation is given as a semi-strong GARCH (1,1) process with heavy tailed errors. We focus on robust estimation of both long-run and short-run volatilities. Our estimation is semiparametric since the long-run volatility is totally unspeci.ed whereas the short-run conditional volatility is a parametric semi-strong GARCH (1,1) process. We propose different robust estimation methods for nonstationary and strictly stationary GARCH parameters with nonparametric long run volatility function. Our estimation is based on a two-step LAD procedure. We establish the relevant asymptotic theory of the proposed estimators. Numerical results lend support to our theoretical results.
semiparametric heavy-tailed errors time varying nonstationary multiplicative GARCH