SSE/EFI Working Paper Series in Economics and Finance
Modelling Conditional and Unconditional Heteroskedasticity with Smoothly Time-Varying Structure
() and Timo Teräsvirta
Abstract: In this paper, we propose two parametric alternatives to
the standard GARCH model. They allow the conditional variance to have a
smooth time-varying structure of either additive or multiplicative type.
The suggested parameterizations describe both nonlinearity and structural
change in the conditional and unconditional variances where the transition
between regimes over time is smooth. A modelling strategy for these new
time-varying parameter GARCH models is developed. It relies on a sequence
of Lagrange multiplier tests, and the adequacy of the estimated models is
investigated by Lagrange multiplier type misspecification tests.
Finite-sample properties of these procedures and tests are examined by
simulation. An empirical application to daily stock returns and another one
to daily exchange rate returns illustrate the functioning and properties of
our modelling strategy in practice. The results show that the long memory
type behaviour of the sample autocorrelation functions of the absolute
returns can also be explained by deterministic changes in the unconditional
Keywords: Conditional heteroskedasticity; Structural change; Lagrange multiplier test; Misspecification test; Nonlinear time series; Time-varying parameter model.; (follow links to similar papers)
JEL-Codes: C12; C22; C51; C52; (follow links to similar papers)
56 pages, January 24, 2008
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- This paper is published as:
Amado, Cristina and Timo Teräsvirta, (2013), 'Modelling volatility by variance decomposition', Journal of Econometrics, Vol. 175, pages 142-153
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