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The Economic Research Institute, Stockholm School of Economics SSE/EFI Working Paper Series in Economics and Finance

No 292:
Evaluating GARCH models

Stefan Lundbergh () and Timo Teräsvirta ()

Abstract: In this paper a unified framework for testing the adequacy of an estimated GARCH model is presented. Parametric LM or LM type tests of no ARCH in standardized errors, linearity, and parameter constancy are proposed. The asymptotic null distributions of the tests are standard, which makes application easy. Versions of the tests that are robust against nonnormal errors are provided. The finite sample properties of the test statistics are investigated by simulation. The robust tests prove superior to the nonrobust ones when the errors are nonnormal. They also compare favourably in terms of power with misspecification tests previously proposed in the literature.

Keywords: Conditional heteroskedasticity; model misspecification test; nonlinear time series; parameter constancy; smooth transition GARCH.; (follow links to similar papers)

JEL-Codes: C22; C52; (follow links to similar papers)

26 pages, December 18, 1998, Revised October 9, 2001

This is the final revised version (October 2001) of the original (December 1998) paper.

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This paper is published as:
Lundbergh, Stefan and Timo Teräsvirta, (2002), 'Evaluating GARCH models', Journal of Econometrics, Vol. 110, pages 417-435



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