Short patches of outliers, ARCH and volatility modelling

Philip Hans Franses, Dick van Dijk, André Lucas
2004 Applied Financial Economics  
In this paper we test for Generalized AutoRegressive Conditional Heteroskedasticity GARCH in daily data on 22 exchange rates and 13 stock market indices using the standard Lagrange Multiplier LM test for GARCH and a LM test that is resistant to patches of additive outliers. The data span two samples of 5 years ranging from 1986 to 1995. Using asymptotic arguments and Monte Carlo simulations, in which w e evaluate our empirical method, we show that patches of outliers can have signi cant e ects
more » ... signi cant e ects on test outcomes. Our main empirical result is that we nd spurious GARCH in about 40 of the cases, while in many other cases we nd evidence of GARCH even though such sequences of extraordinary observations seem to be present.
doi:10.1080/0960310042000201174 fatcat:f4s6x4ohinc6jndh2oagrgptdy