ARCH models are widely used to estimate conditional variances and covariances in financial time series models. How successfully can ARCH models carry out this estimation when they are misspecified? How can ARCH models be optimally constructed? Nelson and Foster (1994) employed continuous record...

Suppose an observed time series is generated by a stochastic volatility model-i.e., there is an unobservable state variable controlling the volatility of the innovations in the series. As shown by Nelson (1992), and Nelson and Foster (1994), a misspecified ARCH model will often be able to...

It is widely known that conditional covariances of asset returns change over time. Researchers adopt many strategies to accommodate conditional heteroskedasticity. Among the most popular are: (a) chopping the data into short blocks of time and assuming homoskedasticity within the blocks, (b)...