A Simple Solution to the Potential Bias Induced by Information Criteria in Asymmetric GARCH Model Selection
Information criteria (IC) are widely used tools for model selection in financial time series. In GARCH modelling of volatility, ICs can be used to select the correct number of lags and exogenous regressors when the relation between shocks and volatility is symmetric. When volatility is asymmetrically affected by shocks, and the distribution of returns is assumed to be a Student’s t, ICs tend to be either too restrictive or too slack in controlling for overfitting issues. On the one hand, slackness leads to out-of-sample poor performance of the selected model; on the other hand, restrictiveness tends to select the simplest asymmetric GARCH(1,1) which produces News Impact Curves that are not robust to the inclusion of further (endogenous) volatility regressors. I examine four daily returns series and observe asymmetric impact of shocks on volatility. The addition of further ARCH and asymmetry terms generally worsens IC values but improves the News Impact Curve robustness. I find that AIC, Hannan-Quinn (1987) HQ (ln), and Bozdogan (1987) Consistent AIC (log) are the best ICs for a non-slack robust NIC-model selection. Adding one further ARCH and asymmetry term to the asymmetric GARCH(1,1) achieves acceptable News Impact Curve robustness and eliminates the need to use ICs for model selection in GARCH modelling of financial returns series
Year of publication: |
[2023]
|
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Authors: | Franchi, Lorenzo |
Publisher: |
[S.l.] : SSRN |
Subject: | ARCH-Modell | ARCH model | Theorie | Theory | Systematischer Fehler | Bias |
Saved in:
freely available
Extent: | 1 Online-Ressource (30 p) |
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Type of publication: | Book / Working Paper |
Language: | English |
Notes: | Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments August 1, 2023 erstellt |
Other identifiers: | 10.2139/ssrn.4519857 [DOI] |
Source: | ECONIS - Online Catalogue of the ZBW |
Persistent link: https://www.econbiz.de/10014345883
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