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The effect of the GARCH(1,1) on autocorrelation tests in dynamic systems of equations

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Abstract:

Using Monte Carlo methods, the properties of systemwise generalizations of the Breusch–Godfrey test for autocorrelated errors are studied when there are some kinds of GARCH effects among the errors. The analysis, regarding the size of the test, reveals that the GARCH have considerable effects of the properties of the test regarding the size, especially in large systems of equations. The corrected LR tests, however, have been shown to perform satisfactorily in small systems when the errors are white noise or they have low GARCH effects, whilst the commonly used TR2 test behaves badly even in single equations. All tests perform badly, however, when the number of equations increases and the GARCH effect is strong. As regards the power of the test, the GARCH was not found to have any significant effects on the power properties of the test.

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/00036840500118804

Affiliations: 1: Department of Statistics, Lund University 2: Departments of Economics and Statistics, Jönköping and Växjö Universities, Sweden

Publication date: September 10, 2005

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