A simple test for GARCH against a stochastic volatility
The GARCH model and the Stochastic Volatility [SV] model are competing but non-nested models to describe unobserved volatility in asset returns. We propose a GARCH model with an additional error term, which can capture SV model properties, and which can be used to test GARCH against SV. We discuss model representation, parameter estimation and a simple test for model selection. Furthermore, we derive the theoretical moments and the autocorrelation function of our new model. We illustrate its merits for 9 daily stock return series.
|Keywords||GARCH, model selection, stochastic volatility|
Franses, Ph.H.B.F., van der Leij, M.J., & Paap, R.. (2005). A simple test for GARCH against a stochastic volatility (No. EI 2005-41). Report / Econometric Institute, Erasmus University Rotterdam. Retrieved from http://hdl.handle.net/1765/7028