Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5097424 | Journal of Econometrics | 2007 | 17 Pages |
Abstract
Tests of ARCH are a routine diagnostic in empirical econometric and financial analysis. However, it is well known that misspecification of the conditional mean may lead to spurious rejection of the null hypothesis of no ARCH. Nonlinearity is a prime example of this phenomenon. There is little work on the extent of the effect of neglected nonlinearity on the properties of ARCH tests. We investigate this using new ARCH testing procedures that are robust to the presence of neglected nonlinearity. Monte Carlo evidence shows that the problem is serious and that the new methods alleviate this problem to a very large extent. We apply the new tests to exchange rate data and find substantial evidence of spurious rejection of the null hypothesis of no ARCH.
Related Topics
Physical Sciences and Engineering
Mathematics
Statistics and Probability
Authors
Andrew P. Blake, George Kapetanios,