Testing Garch-X Type Models

35 Pages Posted: 26 Aug 2017

See all articles by Rasmus Pedersen

Rasmus Pedersen

University of Copenhagen - Department of Economics

Anders Rahbek

University of Copenhagen - Department of Statistics and Operations Research; University of Copenhagen - Department of Economics

Date Written: August 16, 2017

Abstract

We present novel theory for testing for reduction of GARCH-X type models with an exogenous (X) covariate to standard GARCH type models. To deal with the problems of potential nuisance parameters on the boundary of the parameter space as well as lack of identification under the null, we exploit a noticeable property of specific zero-entries in the inverse information of the GARCH-X type models. Specifically, we consider sequential testing based on two likelihood ratio tests and as demonstrated the structure of the inverse information implies that the proposed test neither depends on whether the nuisance parameters lie on the boundary of the parameter space, nor on lack of identification. Our general results on GARCH-X type models are applied to Gaussian based GARCH-X models, GARCH-X models with Student's t-distributed innovations as well as the integer-valued GARCH-X (PAR-X) models.

Keywords: Testing on the Boundary; Likelihood-Ratio Test; Non-Identification; GARCH-X; PAR-X; GARCH Models; Integer-Valued

JEL Classification: C32

Suggested Citation

Pedersen, Rasmus and Rahbek, Anders, Testing Garch-X Type Models (August 16, 2017). Available at SSRN: https://ssrn.com/abstract=3024648 or http://dx.doi.org/10.2139/ssrn.3024648

Rasmus Pedersen (Contact Author)

University of Copenhagen - Department of Economics ( email )

Copenhagen University Library
Licenssekretariatet Nørre Alle 49
DK-2200 Copenhagen N.
Denmark

Anders Rahbek

University of Copenhagen - Department of Statistics and Operations Research

Universitetsparken 5
DK-2100
Denmark
+45 3532 0682 (Phone)

University of Copenhagen - Department of Economics

Øster Farimagsgade 5
Bygning 26
1353 Copenhagen K.
Denmark

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