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A New Test for Simultaneous Estimation of Unit Roots and GARCH Risk in the Presence of Stationary Conditional Heteroscedasticity Disturbances
Jönköping University, Jönköping International Business School, JIBS, Economics.
2008 (English)In: Applied Financial Economics, ISSN 0960-3107, Vol. 18, no 7, 527-558 p.Article in journal (Refereed) Published
Abstract [en]

According to previous research, standard unit root tests are considered robust to stationary GARCH distortions. These conclusions are in fact correct when the number of observations is extraordinarily high. However, simulation experiments in this study, using more normal sample sizes, reveal that eight of the most commonly applied unit root tests exhibit considerable bias in the size in the presence of fairly moderate GARCH distortions. As a remedy for the disturbances from GARCH, this paper presents size-corrected unbiased critical values for all these examined tests. Nevertheless there is still reduced power in the presence of stationary GARCH distortions. As a solution, a completely new test is formulated which simultaneously models unit roots and the interconnected parameters of GARCH risk. For empirically relevant sample sizes, this new test exhibits superior size and power properties compared with all the traditional unit root tests in the presence of GARCH disturbances.

Place, publisher, year, edition, pages
2008. Vol. 18, no 7, 527-558 p.
National Category
Economics
Identifiers
URN: urn:nbn:se:hj:diva-1476OAI: oai:DiVA.org:hj-1476DiVA: diva2:4707
Available from: 2007-09-10 Created: 2009-03-10Bibliographically approved
In thesis
1. Simulation-Based Approaches in Financial Econometrics
Open this publication in new window or tab >>Simulation-Based Approaches in Financial Econometrics
2007 (English)Doctoral thesis, comprehensive summary (Other academic)
Abstract [en]

This doctoral thesis consists of four chapters all related to the field of financial econometrics. The main contributions are based on the empirical evaluation of theories in or related to financial economics supported by the recent advances of models and simulation-based methods in time-series econometrics.

In chapter II, following the summarizing introductory chapter, a new unit root test is developed which by the use of simulation is demonstrated to be robust in the presence of generalized conditional heteroscedasticity (GARCH) distortions. In the presence of GARCH disturbances, for empirically relevant sample sizes, this new test exhibits superior statistical size and power properties compared with a sample of eight commonly used traditional unit root tests.

In chapter III, a combination of an empirical and simulation-based evaluation of the theory of long-run purchasing power parity (PPP) is conducted. It is demonstrated that the traditional unit root tests of PPP are non-robust to the empirically identified GARCH distortions in the real exchange rates (RER). Therefore, based on this study and currently existing research, it appears virtually impossible to empirically come to a credible conclusion regarding whether long-run PPP holds or not.

In chapter IV certain financial stability requirements of the Basel (II) Accord are scrutinized. It is concluded that the Basel requirement of an estimation period that is at least one year long for the calculation of minimum capital risk requirements is not empirically justified.

Place, publisher, year, edition, pages
Jönköping: Internationella Handelshögskolan, 2007. 153 p.
Series
JIBS Dissertation Series, 43
Keyword
Economics, Nationalekonomi
Identifiers
urn:nbn:se:hj:diva-954 (URN)91-89164-80-6 (ISBN)
Public defence
2007-09-28, B1014, Internationella Handelshögskolan, 10:00 (English)
Opponent
Available from: 2007-09-10 Created: 2007-09-10 Last updated: 2009-04-01Bibliographically approved

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