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Computational Economics

, Volume 13, Issue 2, pp 147–162 | Cite as

The Effect of (Mis-Specified) GARCH Filters on the Finite Sample Distribution of the BDS Test

  • Chris Brooks
  • Saeed M. Heravi
Article

Abstract

This paper considers the effect of using a GARCH filter on the properties of the BDS test statistic as well as a number of other issues relating to the application of the test. It is found that, for certain values of the user-adjustable parameters, the finite sample distribution of the test is far-removed from asymptotic normality. In particular, when data generated from some completely different model class are filtered through a GARCH model, the frequency of rejection of iid falls, often substantially. The implication of this result is that it might be inappropriate to use non-rejection of iid of the standardised residuals of a GARCH model as evidence that the GARCH model ‘fits’ the data.

BDS test GARCH filters nonlinearity test finite sample distribution Monte Carlo study 

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Copyright information

© Kluwer Academic Publishers 1999

Authors and Affiliations

  1. 1.ISMA Centre, Department of EconomicsThe University of ReadingReadingUK; e-mail
  2. 2.Cardiff Business SchoolUniversity of WalesCardiffUK

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