GEL Estimation for Heavy-Tailed GARCH Models with Robust Empirical Likelihood Inference

Abstract

We construct a Generalized Empirical Likelihood estimator for a GARCH(1,1) model with a possibly heavy tailed error. The estimator imbeds tail-trimmed estimating equations allowing for over-identifying conditions, asymptotic normality, efficiency and empirical likelihood based confidence regions for very heavy-tailed random volatility data. We show the implied probabilities from the tail-trimmed Continuously Updated Estimator elevate weight for usable large values, assign large but not maximum weight to extreme observations, and give the lowest weight to non-leverage points. Finally, we present robust versions of Generalized Empirical Likelihood Ratio, Wald, and Lagrange Multiplier tests, and an efficient and heavy tail robust moment estimator with an application to the estimation of a conditionally heteroscedastic asset's expected shortfall.

Keywords: GEL, GARCH, tail trimming, heavy tails, robust inference, efficient moment estimation