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Title: Specification tests for GARCH processes with nuisance parameters on the boundary Authors:  Indeewara Perera - University of Sheffield (United Kingdom) [presenting]
Abstract: Tests for the correct specification of the conditional variance function in GARCH models are developed when the true parameter may lie on the boundary of the parameter space. The test statistics considered are of Kolmogorov-Smirnov and Cramer-von Mises type, and are based on a certain empirical process marked by centered squared residuals. The limiting distributions of the test statistics are not free from (unknown) nuisance parameters, and hence critical values cannot be tabulated. A novel bootstrap procedure is proposed to implement the tests; it is shown to be asymptotically valid under general conditions, irrespective of the presence of nuisance parameters on the boundary. The proposed bootstrap approach is based on shrinking of the parameter estimates used to generate the bootstrap sample toward the boundary of the parameter space at a proper rate. It is simple to implement and fast in applications, as the associated test statistics have simple closed-form expressions. A simulation study demonstrates that the new tests: (i) have excellent finite sample behaviour in terms of empirical rejection probabilities under the null as well as under the alternative; (ii) provide a useful complement to existing procedures based on Ljung-Box type approaches. Two data examples are considered to illustrate the tests.