A Simple Test for GARCH Against a Stochastic Volatility Model

Posted: 17 Jun 2008

See all articles by Philip Hans Franses

Philip Hans Franses

Erasmus University Rotterdam (EUR) - Department of Econometrics

Marco van der Leij

CeNDEF, University of Amsterdam; Tinbergen Institute; De Nederlandsche Bank - Research Department

Richard Paap

Erasmus University Rotterdam (EUR) - Department of Econometrics; Tinbergen Institute; Erasmus Research Institute of Management (ERIM)

Date Written: Summer 2008

Abstract

GARCH models and Stochastic Volatility (SV) models can both be used to describe unobserved volatility in asset returns. We consider the issue of testing a GARCH model against an SV model. For that purpose, we propose a new and parsimonious GARCH-t model with an additional restricted moving average term, which can capture SV model properties. We discuss model representation, parameter estimation, and our simple test for model selection. Furthermore, we derive the theoretical moments and the autocorrelation function of our new model. We illustrate our model and test for nine daily stock-return series.

Keywords: C22, C52, GARCH, model selection, stochastic volatility

Suggested Citation

Franses, Philip Hans and van der Leij, Marco Juri and Paap, Richard, A Simple Test for GARCH Against a Stochastic Volatility Model (Summer 2008). Journal of Financial Econometrics, Vol. 6, Issue 3, pp. 291-306, 2008. Available at SSRN: https://ssrn.com/abstract=1146713 or http://dx.doi.org/nbn008

Philip Hans Franses (Contact Author)

Erasmus University Rotterdam (EUR) - Department of Econometrics ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31 10 408 1278 (Phone)
+31 10 408 9162 (Fax)

Marco Juri van der Leij

CeNDEF, University of Amsterdam ( email )

Roetersstraat 11
Amsterdam, NL-1018WB
Netherlands
+31 20 525 7356 (Phone)

HOME PAGE: http://home.staff.uva.nl/m.j.vanderleij

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

De Nederlandsche Bank - Research Department ( email )

P.O. Box 98
1000 AB Amsterdam
Netherlands

Richard Paap

Erasmus University Rotterdam (EUR) - Department of Econometrics ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Tinbergen Institute ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

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