Misspecification and Domain Issues in Fitting Garch(1, 1) Models: A Monte Carlo Investigation

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 analyse the impact of misspecification on forecasted volatilities, showing that innovations with light tails can lead to a remarkable overestimate of volatilities. Note: The following files were submitted by the author for peer review, but cannot be converted to PDF. You must view these files (e.g. movies) online. Bellini-Bottolo-miss-revision.zip URL: http://mc.manuscriptcentral.com/lssp E-mail: [email protected] Communications in Statistics Simulation and Computation pe er -0 05 14 33 3, v er si on 1 2 Se p 20 10 Author manuscript, publ shed i "Communications in Statistics Simulation and Computation 38, 01 (2008) 31-45" DOI : 10.1080/03610910802395653