Title: Testing for an omitted long-term component in multiplicative GARCH models
Authors: Christian Conrad - Heidelberg University (Germany) [presenting]
Abstract: A misspecification test is developed for the multiplicative two-component GARCH-MIDAS model. In the GARCH-MIDAS model a short-term unit variance GARCH component fluctuates around a smoothly time-varying long-term component which is driven by the dynamics of an explanatory variable. We suggest a Lagrange Multiplier statistic for testing the null hypothesis that the variable has no explanatory power. Hence, under the null hypothesis the long-term component is constant and the GARCH-MIDAS reduces to the simple GARCH model. We derive the asymptotic theory for our test statistic and investigate its finite sample properties by Monte-Carlo simulation. The usefulness of our procedure is illustrated by an empirical application to S\&P 500 return data.