A Simple Test for GARCH against a Stochastic Volatility Model
GARCH models and Stochastic Volatility (SV) models can both be used to describe unobserved volatility in asset returns. We consider the issue of testing a GARCH model against an SV model. For that purpose, we propose a new and parsimonious GARCH-t model with an additional restricted moving average term, which can capture SV model properties. We discuss model representation, parameter estimation, and our simple test for model selection. Furthermore, we derive the theoretical moments and the autocorrelation function of our new model. We illustrate our model and test for nine daily stock-return series.
|Keywords||GARCH models, model selection, stochastic volatility|
|JEL||Time-Series Models; Dynamic Quantile Regressions (jel C22), Model Evaluation and Testing (jel C52)|
|Persistent URL||dx.doi.org/10.1093/jjfinec/nbn008, hdl.handle.net/1765/13212|
|Series||Econometric Institute Reprint Series|
|Journal||Journal of Financial Econometrics|
Franses, Ph.H.B.F, van der Leij, M.J, & Paap, R. (2008). A Simple Test for GARCH against a Stochastic Volatility Model. Journal of Financial Econometrics, 6(3), 291–306. doi:10.1093/jjfinec/nbn008