In this work we investigate the impact of misspecification of the innovations in fitting Garch(1, 1) models. We show that an incorrect specification of the innovations together with the reduction of the parameter space to the weak stationarity region, can give rise to a spurious IGARCH effect. We address this point through an extensive Monte Carlo simulation study. We also analyze the impact of misspecification on forecasted volatilities, showing that innovations with light tails can lead to a remarkable overestimate of volatilities.
Bellini, F., Bottolo, L. (2009). Misspecification and domain issues in fitting Garch(1,1) models. COMMUNICATIONS IN STATISTICS. SIMULATION AND COMPUTATION, 38(1), 31-45 [10.1080/03610910802395653].
Misspecification and domain issues in fitting Garch(1,1) models
BELLINI, FABIO;
2009
Abstract
In this work we investigate the impact of misspecification of the innovations in fitting Garch(1, 1) models. We show that an incorrect specification of the innovations together with the reduction of the parameter space to the weak stationarity region, can give rise to a spurious IGARCH effect. We address this point through an extensive Monte Carlo simulation study. We also analyze the impact of misspecification on forecasted volatilities, showing that innovations with light tails can lead to a remarkable overestimate of volatilities.
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