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Simple, Skewness-Based GMM Estimation of the Semi-Strong GARCH(1,1) Model

Todd, Prono (2009): Simple, Skewness-Based GMM Estimation of the Semi-Strong GARCH(1,1) Model.

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Abstract

IV estimators with an instrument vector composed only of past squared residuals, while applicable to the semi-strong ARCH(1) model, do not extend to the semi-strong GARCH(1,1) case because of underidentification. Augmenting the instrument vector with past residuals, however, renders traditional IV estimation feasible, if the residuals are skewed. The proposed estimators are much simpler to implement than efficient IV estimators, yet they retain improved finite sample performance over QMLE. Jackknife versions of these estimators deal with the issues caused by many (potentially weak) instruments. A Monte Carlo study is included, as is an empirical application involving foreign currency spot returns.

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