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Testing for nonlinearity in mean and volatility for heteroskedastic models

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  • Chen, Cathy W.S.
  • Gerlach, Richard H.
  • Tai, Amanda P.J.

Abstract

A simple test for threshold nonlinearity in either the mean or volatility equation, or both, of a heteroskedastic time series model is proposed. The procedure extends current Bayesian Markov chain Monte Carlo methods and threshold modelling by employing a general double threshold GARCH model that allows for an explosive, non-stationary regime. Posterior credible intervals on model parameters are used to detect and specify threshold nonlinearity in the mean and/or volatility equations. Simulation experiments demonstrate that the method works favorably in identifying model specifications varying in complexity from the conventional GARCH up to the full double-threshold nonlinear GARCH model with an explosive regime, and is robust to over-specification in model orders.

Suggested Citation

  • Chen, Cathy W.S. & Gerlach, Richard H. & Tai, Amanda P.J., 2008. "Testing for nonlinearity in mean and volatility for heteroskedastic models," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 79(3), pages 489-499.
    • Handle: RePEc:eee:matcom:v:79:y:2008:i:3:p:489-499
    DOI: 10.1016/j.matcom.2008.01.044
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    References listed on IDEAS

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