Evaluation of Ashley and Patterson model diagnostic tool in selection of ARCH/GARCH family models: case of natural rubber prices at the Colombo auction

Abstract

There is a substantial amount of literature in favor of models in the ARCH/GARCH family as premier class of models for modeling financial and economic returns are of nonlinear form. However, there are many gaps in nonlinear model diagnosis and none of the nonlinearity tests are in wide acceptance. In this study, a new model diagnostic tool proposed by Ashley and Patterson in 2001 was identified as a useful diagnostic technique compared to other techniques in model selection. Moreover, it was found that the model diagnosis was straight forward with Ashley and Patterson test statistic (AP) when it is not straight forward with the use of other methods. Little work was found on the true process generating mechanism of returns of Ribbed Smoked Sheets No. 1 (RSS1) prices in the Colombo auction. In this study, by using AP, it was found that the true process generating mechanism of returns of RSS1 is nonlinear and the EGARCH (1,1) to be the most promising model that correctly generates returns of RSS1.Tropical Agricultural Research Vol. 25 (1): 109-119 (2013)

Keywords

• model evaluation, price returns, rss1, arch/garch family