Omitted asymmetric persistence and conditional heteroskedasticity

Abstract

We show that asymmetric persistence induces ARCH effects, but the LM-ARCH test has power against it. On the other hand, the test for asymmetric dynamics proposed by Koenker and Xiao (2004) has correct size under the presence of ARCH errors. These results suggest that the LM-ARCH and the Koenker-Xiao tests may be used in applied research as complementary tools.