Testing for ARCH in the Presence of Additive Outliers
In this paper we investigate the properties of the Lagrange Multiplier (LM) test for autoregressive conditional heteroskedasticity (ARCH) and generalized ARCH (GARCH) in the presence of additive outliers (AO's). We show analytically that both the asymptotic size and power are adversely affected if AO's are neglected: the test rejects the null hypothesis of homoskedasticity too often when it is in fact true, while the test has difficulty detecting genuine GARCH effects. Several Monte Carlo experiments show that these phenomena occur in small samples as well. We design and implement a robust test, which has better size and power properties than the conventional test in the presence of AO's. Applications to the French industrial production series and weekly returns of the Spanish peseta/US dollar exchange rate reveal that, sometimes, apparent GARCH effects may be due to only a small number of outliers and, conversely, that genuine GARCH effects can be masked by outliers.
|Keywords||Lagrange multiplier test, Outliers, generalized autoregressive conditional heteroskedasticity, robust test|
|JEL||Hypothesis Testing (jel C12), Time-Series Models; Dynamic Quantile Regressions (jel C22)|
|Series||Econometric Institute Research Papers|
van Dijk, D.J.C, Franses, Ph.H.B.F, & Lucas, A. (1996). Testing for ARCH in the Presence of Additive Outliers (No. EI 9659-/A). Econometric Institute Research Papers. Retrieved from http://hdl.handle.net/1765/1395
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