The impact of stationarity assessment on studies of volatility and value-at-risk
Recent research on volatility of asset returns demonstrates that model innovations frequently show unconditional heteroscedasticity, On the other hand, ARMA-GARCH models incorporate the heteroscedasticity only in the conditional distribution of the innovations. assuming the unconditional distributions to be stationary (see, e.g., [1,2]). Given the observed unconditional heteroscedasticity of the return innovations [3], there is a need to overcome this shortcoming of existing models. The purpose of this paper is to introduce a test of stationarity of the innovations and show its impact in the analysis of volatility and value at risk. The methodological results are accompanied with examples and simulations. (C) 2001 Elsevier Science Ltd. All rights reserved.
test of stationarity value at risk