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The effect of (mis-specified) GARCH filters on the finite sample distribution of the BDS test

Brooks, C. and Heravi, S. M. (1999) The effect of (mis-specified) GARCH filters on the finite sample distribution of the BDS test. Computational Economics, 13 (2). pp. 147-162. ISSN 1572-9974

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To link to this item DOI: 10.1023/A:1008612905284

Abstract/Summary

This paper considers the effect of using a GARCH filter on the properties of the BDS test statistic as well as a number of other issues relating to the application of the test. It is found that, for certain values of the user-adjustable parameters, the finite sample distribution of the test is far-removed from asymptotic normality. In particular, when data generated from some completely different model class are filtered through a GARCH model, the frequency of rejection of iid falls, often substantially. The implication of this result is that it might be inappropriate to use non-rejection of iid of the standardised residuals of a GARCH model as evidence that the GARCH model ‘fits’ the data.

Item Type:Article
Refereed:Yes
Divisions:Henley Business School > ICMA Centre
ID Code:35985
Publisher:Springer

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