The effect of (mis-specified) GARCH filters on the finite sample distribution of the BDS test

Brooks, C. ORCID: https://orcid.org/0000-0002-2668-1153 and Heravi, S. M. (1999) The effect of (mis-specified) GARCH filters on the finite sample distribution of the BDS test. Computational Economics, 13 (2). pp. 147-162. ISSN 1572-9974 doi: 10.1023/A:1008612905284

Abstract/Summary

This paper considers the effect of using a GARCH filter on the properties of the BDS test statistic as well as a number of other issues relating to the application of the test. It is found that, for certain values of the user-adjustable parameters, the finite sample distribution of the test is far-removed from asymptotic normality. In particular, when data generated from some completely different model class are filtered through a GARCH model, the frequency of rejection of iid falls, often substantially. The implication of this result is that it might be inappropriate to use non-rejection of iid of the standardised residuals of a GARCH model as evidence that the GARCH model ‘fits’ the data.

Item Type	Article
URI	https://reading-clone.eprints-hosting.org/id/eprint/35985
Identification Number/DOI	10.1023/A:1008612905284
Refereed	Yes
Divisions	Henley Business School > Finance and Accounting
Publisher	Springer
Download/View statistics	View download statistics for this item