One-sided testing for arch effects using wavelets

Yongmiao Hong, Jin Lee

Research output: Contribution to journalArticlepeer-review

19 Scopus citations

Abstract

There has been increasing interest recently in hypothesis testing with inequality restrictions. An important example in time series econometrics is hypotheses on autoregressive conditional heteroskedasticity (ARCH). We propose a one-sided test for ARCH effects using a wavelet spectral density estimator at frequency zero of a squared regression residual series. The square of an ARCH process is positively correlated at all lags, resulting in a spectral mode at frequency zero. In particular, it has a spectral peak at frequency zero when ARCH effects are persistent or when ARCH effects are small at each individual lag but carry over a long distributional lag. As a joint time-frequency decomposition method, wavelets can effectively capture spectral peaks. We expect that wavelets are more powerful than kernels in small samples when ARCH effects are persistent or when ARCH effects have a long distributional lag. This is confirmed in a simulation study.

Original languageEnglish
Pages (from-to)1051-1081
Number of pages31
JournalEconometric Theory
Volume17
Issue number6
DOIs
StatePublished - 2001

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