A NONNESTED TEST OF GARCH VS. EGARCH MODELS

This study uses a Cox-type non-nested test. The test is obtained using Monte Carlo hypothesis tests with the log likelihood ratio as the tes t statistic. Monte Carlo methods are used to obtain the probability of a larger value of the test statistic under the null hypothesis. The a pproach used does not rely upon asymptotic normality. Using the maximu m likelihood estimation technique, two competing time series models, g eneralized autoregressive conditional heteroscedasticity (GARCH) and e xponential GARCH (EGARCH) models of daily spot prices of Deutsche mark are estimated. Using Monte Carlo hypothesis tests, then, p-values for GARCH vs. EGARCH models are calculated. The EGARCH model cannot be re jected, while the GARCH model is rejected.