English, Article, Journal or magazine article edition: Testing for ARCH in the Presence of a Possibly Misspecified Conditional Mean Robin L. Lumsdaine; Serena Ng

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Bookmark: http://trove.nla.gov.au/version/73280
Physical Description
  • preprint
Language
  • English

Edition details

Title
  • Testing for ARCH in the Presence of a Possibly Misspecified Conditional Mean
Author
  • Robin L. Lumsdaine
  • Serena Ng
Physical Description
  • preprint
Notes
  • Ever since the development of the Autoregressive Conditional Heteroskedasticity (ARCH) model (Engle [1982]), testing for the presence of ARCH has become a routine diagnostic. One popular method of testing for ARCH is T times the R^2 from a regression of squared residuals on p of its lags. This test has been shown to have a Lagrange multiplier interpretation and is asymptotically distributed as a Chi^2(p) random variable. Underlying this test is the assumption of a correctly specified conditional mean. In this paper, we consider the properties of the ARCH test when there is a possibly misspecified conditional mean. Examples of misspecification include omitted variables, structural change, and parameter instability. We show that misspecification will lead to overrejection of the null of conditional homoskedasticity. We demonstrate the use of recursive residuals to improve the fit of a first stage conditional mean regression. We illustrate these results via Monte Carlo simulation and consider two empirical examples.
  • ARCH, model misspecification, recursive residuals, Lagrange Multiplier test
  • RePEc:boc:bocoec:370
Language
  • English
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