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Misspecification Testing in GARCH-MIDAS Models

Conrad, Christian ; Schienle, Melanie

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Abstract

We develop a misspecification test for the multiplicative two-component GARCH-MIDAS model suggested in Engle et al. (2013). In the GARCH-MIDAS model a short-term unit variance GARCH component fluctuates around a smoothly time-varying long-term component which is driven by the dynamics of an explanatory variable. We suggest a Lagrange Multiplier statistic for testing the null hypothesis that the variable has no explanatory power. Hence, under the null hypothesis the long-term component is constant and the GARCH-MIDAS reduces to the simple GARCH model. We derive the asymptotic theory for our test statistic and investigate its finite sample properties by Monte-Carlo simulation. The usefulness of our procedure is illustrated by an empirical application to S&P 500 return data.

Item Type: Working paper
Series Name: Discussion Paper Series, University of Heidelberg, Department of Economics
Volume: 0597
Place of Publication: Heidelberg
Date Deposited: 09 Jul 2015 08:50
Date: July 2015
Number of Pages: 34
Faculties / Institutes: The Faculty of Economics and Social Studies > Alfred-Weber-Institut for Economics
Subjects: 330 Economics
Uncontrolled Keywords: Volatility Component Models, LM test, Long-term Volatility.
Schriftenreihe ID: Discussion Paper Series / University of Heidelberg, Department of Economics
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