Joint research unit 7235

Testing for misspecification in the short-run component of GARCH-type models

Studies in Nonlinear Dynamics and Econometrics

Econometrie

22

2017

Emmanuel Flachaire, Anne Péguin-Feissolle, Thomas Chuffart

In this article, a misspecification test in conditional volatility and GARCH-type models is presented. We propose a Lagrange Multiplier type test based on a Taylor expansion to distinguish between (G)ARCH models and unknown GARCH-type models. This new test can be seen as a general misspecification test of a large set of GARCH-type univariate models. It focuses on the short-term component of the volatility. We investigate the size and the power of this test through Monte Carlo experiments and we compare it to two other standard Lagrange Multiplier tests, which are more restrictive. We show the usefulness of our test with an illustrative empirical example based on daily exchange rate returns.

AGENDA

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