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A TEST OF THE GARCH(1, 1) SPECIFICATION FOR DAILY STOCK RETURNS

Published online by Cambridge University Press:  10 May 2010

Richard A. Ashley  and
Douglas M. Patterson
Richard A. Ashley
Affiliation:
Virginia Tech (VPI)
Douglas M. Patterson*
Affiliation:
Virginia Tech (VPI)
*
Address correspondence to: Douglas M. Patterson, Department of Finance (0221), Virginia Tech, Blacksburg, VA 24061, USA; e-mail: amex@vt.edu.
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Abstract

Daily financial returns (and daily stock returns, in particular) are commonly modeled as GARCH(1, 1) processes. Here we test this specification using new model evaluation technology developed by Ashley and Patterson that examines the ability of the estimated model to reproduce features of particular interest: various aspects of nonlinear serial dependence, in the present instance. Using daily returns to the CRSP equally weighted stock index, we find that the GARCH(1, 1) specification cannot be rejected; thus, this model appears to be reasonably adequate in terms of reproducing the kinds of nonlinear serial dependence addressed by the battery of nonlinearity tests used here.

Keywords

GARCHStock ReturnsVolatilityModel Evaluation
Type
Articles
Information
Macroeconomic Dynamics , Volume 14 , Supplement S1: Nonlinear Time Series , May 2010 , pp. 137 - 144
Copyright
Copyright © Cambridge University Press 2010

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