European Business Schools Librarian's Group
SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics
No 292: Evaluating GARCH models
Stefan Lundbergh () and Timo Teräsvirta ()
Additional contact information
Stefan Lundbergh: Dept. of Economic Statistics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, S-113 83 Stockholm, Sweden
Timo Teräsvirta: Dept. of Economic Statistics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, S-113 83 Stockholm, Sweden
Abstract: In this paper a unified framework for testing the adequacy of an estimated GARCH model is presented. Parametric LM or LM type tests of no ARCH in standardized errors, linearity, and parameter constancy are proposed. The asymptotic null distributions of the tests are standard, which makes application easy. Versions of the tests that are robust against nonnormal errors are provided. The finite sample properties of the test statistics are investigated by simulation. The robust tests prove superior to the nonrobust ones when the errors are nonnormal. They also compare favourably in terms of power with misspecification tests previously proposed in the literature.
Keywords: Conditional heteroskedasticity; model misspecification test; nonlinear time series; parameter constancy; smooth transition GARCH.
26 pages, First version: December 18, 1998. Revised: October 3, 2001. Earlier revisions: May 3, 1999, October 2, 2000, October 2, 2000, October 2, 2000, October 9, 2001.
Note: This is the final revised version (October 2001) of the original (December 1998) paper.
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