On the invertibility of EGARCH( p , q )

• Published in: Econometric reviews Vol. 37; no. 8; pp. 824 - 849
• Main Authors: Martinet, Guillaume Gaetan, McAleer, Michael
• Format: Journal Article
• Language: English
• Published: New York Taylor & Francis Ltd 14.09.2018
• Subjects: Asymptotic properties; Autoregressive processes; Computer simulation; Econometrics; Economic models; Inequality; Leverage; Mathematical models; Maximum likelihood estimators; Parameters; Simulation; Specification; Stochastic models; Volatility
• ISSN: 0747-4938; 1532-4168
• DOI: 10.1080/07474938.2016.1167994

Of the two most widely estimated univariate asymmetric conditional volatility models, the exponential GARCH (or EGARCH) specification is said to be able to capture asymmetry, which refers to the different effects on conditional volatility of positive and negative effects of equal magnitude, and leverage, which refers to the negative correlation between the returns shocks and subsequent shocks to volatility. However, the statistical properties of the (quasi-)maximum likelihood estimator (QMLE) of the EGARCH(p, q) parameters are not available under general conditions, but only for special cases under highly restrictive and unverifiable sufficient conditions, such as EGARCH(1,0) or EGARCH(1,1), and possibly only under simulation. A limitation in the development of asymptotic properties of the QMLE for the EGARCH(p, q) model is the lack of an invertibility condition for the returns shocks underlying the model. It is shown in this article that the EGARCH(p, q) model can be derived from a stochastic process, for which sufficient invertibility conditions can be stated simply and explicitly when the parameters respect a simple condition.11Using the notation introduced in part 2, this refers to the cases where α [greater than or equal to] |γ| or α [less-than or equal to] - |γ|. The first inequality is generally assumed in the literature related to the invertibility of EGARCH. This article provides (in the Appendix) an argument for the possible lack of invertibility when these conditions are not met.This will be useful in reinterpreting the existing properties of the QMLE of the EGARCH(p, q) parameters.