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Modeling conditional correlations of asset returns : a smooth transition approach
No full textIn this paper we propose a new multivariate GARCH model with time-varying conditional correlation structure. The time-varying conditional correlations change smoothly between two extreme states of constant correlations according to a predetermined or exogenous transition variable. An LM–test is derived to test the constancy of correlations and LM- and Wald tests to test the hypothesis of partially constant correlations. Analytical expressions for the test statistics and the required derivatives are provided to make computations feasible. An empirical example based on daily return series of five frequently traded stocks in the S&P 500 stock index completes the paper
Modeling Multivariate Autoregressive Conditional Heteroskedasticity with the Double Smooth Transition Conditional Correlation GARCH Model
No full textIn this paper, we propose a multivariate GARCH model with a time-varying conditional correlation structure. The new double smooth transition conditional correlation (DSTCC) GARCH model extends the smooth transition conditional correlation (STCC) GARCH model of Silvennoinen and Teräsvirta (2005) by including another variable according to which the correlations change smoothly between states of constant correlations. A Lagrange multiplier test is derived to test the constancy of correlations against the DSTCC-GARCH model, and another one to test for another transition in the STCC-GARCH framework. In addition, other specification tests, with the aim of aiding the model building procedure, are considered. Analytical expressions for the test statistics and the required derivatives are provided. Applying the model to the stock and bond futures data, we discover that the correlation pattern between them has dramatically changed around the turn of the century. The model is also applied to a selection of world stock indices, and we find evidence for an increasing degree of integration in the capital markets. Copyright The Author 2009. Published by Oxford University Press. All rights reserved. For permissions, please e-mail: [email protected]., Oxford University Press.
Testing constancy of unconditional variance in volatility models by misspecification and specification tests
No full textThe topic of this paper is testing the hypothesis of constant unconditional variance in <i>GARCH</i> models against the alternative that the unconditional variance changes deterministically over time. Tests of this hypothesis have previously been performed as misspecification tests after fitting a <i>GARCH</i> model to the original series. It is found by simulation that the positive size distortion present in these tests is a function of the kurtosis of the <i>GARCH</i> process. Adjusting the size by numerical methods is considered. The possibility of testing the constancy of the unconditional variance before fitting a <i>GARCH</i> model to the data is discussed. The power of the ensuing test is vastly superior to that of the misspecification test and the size distortion minimal. The test has reasonable power already in very short time series. It would thus serve as a test of constant variance in conditional mean models. An application to exchange rate returns is included
A smooth transition logit model of the effects of deregulation in the electricity market
No full textThis paper introduces the <i>smooth transition logit (STL)</i> model that is designed to detect and model situations in which there is structural change in the behaviour underlying the latent index from which the binary dependent variable is constructed. The maximum likelihood estimators of the parameters of the model are derived along with their asymptotic properties, together with a Lagrange multiplier test of the null hypothesis of linearity in the underlying latent index. The development of the STL model is motivated by the desire to assess the impact of deregulation in the Queensland electricity market and ascertain whether increased competition has resulted in significant changes in the behaviour of the spot price of electricity, specifically with respect to the occurrence of periodic abnormally high prices. The model allows the timing of any change to be endogenously determined and also market participants' behaviour to change gradually over time. The main results provide clear evidence in support of a structural change in the nature of price events, and the endogenously determined timing of the change is consistent with the process of deregulation in Queensland
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