Asymmetric linear double autoregression

Abstract

This paper proposes the asymmetric linear double autoregression, which jointly models the conditional mean and conditional heteroscedasticity characterized by asymmetric effects. A sufficient condition is established for the existence of a strictly stationary solution. With a quasi-maximum likelihood estimation procedure introduced, a Bayesian information criterion and its modified version are proposed for model selection. To detect asymmetric effects in the volatility, the Wald, Lagrange multiplier and quasi-likelihood ratio test statistics are put forward, and their limiting distributions are established under both null and local alternative hypotheses. Moreover, a mixed portmanteau test is constructed to check the adequacy of the fitted model. Simulation studies indicate that the proposed inference tools perform well in finite samples, and an empirical application to NASDAQ Composite Index illustrates the usefulness of the new model.