IBM Can I use SPSS to estimate cross-correlations with pre-whitening?...

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Can I use SPSS to estimate cross-correlations with

pre-whitening?
Technote (troubleshooting)
Problem(Abstract)
I want to estimate cross-correlations between two time series with SPSS, but the CCF procedure doesn't appear to offer
an option to pre-whiten the series. Can I do this in SPSS?

Resolving the problem

Suppose we want to compute cross-correlations between the series x and y, with series x treated as the predictor for
purposes of the pre-whitening. Do the following steps:
1) Model the predictor series using the ARIMA procedure. Once you've decided on the appropriate model, note the
name of the saved residual or error series for that model. Also note the name of the model (e.g., MOD_1), which will be
noted in the ARIMA output.
2) Apply the ARIMA model for the predictor series to the dependent series, using an ARIMA command of the form:
ARIMA dv
/APPLY="MOD_1" FIT.
3) Now use the CCF procedure on the two error series.
In more recent releases with Create Models and Apply Models on the menus under Time Series, replace the first two
steps by modeling x under Create Models, saving the model file, then apply this to y using Apply Models, specifying the
appropriate model file

Historical Number
59021

Document
information
More support for:
SPSS Statistics
Software version:
Not Applicable
Operating system(s):
Platform Independent
Reference #:
1477243
Modified date:
2010-03-22

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9.9 Estimation of ARCH/GARCH models

representation

u t = vt t, vt N 0, 1
t =


0 + 1 u 2t 1 + t21

435

(9.44)
(9.45)

Note that one would not expect u t to be normally distributed it is a N(0, t2 )

disturbance term from the regression model, which will imply it is likely to have
fat tails. A plausible method to test for normality would be to construct the statistic
ut
vt =
(9.46)
t
which would be the model disturbance at each point in time t divided by the
conditional standard deviation at that point in time. Thus, it is the vt that are
assumed to be normally distributed, not u t . The sample counterpart would be
vt =

u t
t

(9.47)

which is known as a standardised residual. Whether the vt are normal can be

examined using any standard normality test, such as the BeraJarque. Typically, vt
are still found to be leptokurtic, although less so than the u t . The upshot is that
the GARCH model is able to capture some, although not all, of the leptokurtosis
in the unconditional distribution of asset returns.
Is it a problem if vt are not normally distributed? Well, the answer is not really.
Even if the conditional normality assumption does not hold, the parameter estimates will still be consistent if the equations for the mean and variance are correctly
specified. However, in the context of non-normality, the usual standard error estimates will be inappropriate, and a different variancecovariance matrix estimator
that is robust to non-normality, due to Bollerslev and Wooldridge (1992), should
be used. This procedure (i.e. maximum likelihood with BollerslevWooldridge
standard errors) is known as quasi-maximum likelihood, or QML.
9.9.3

Estimating GARCH models in EViews

To estimate a GARCH-type model, open the equation specification dialog

box by selecting Quick/Estimate Equation or by selecting Object/New
Object/Equation . . . . Select ARCH from the Estimation Settings Method
selection box. The window in screenshot 9.1 will open.
It is necessary to specify both the mean and the variance equations, as well as the
estimation technique and sample.
The mean equation

The specification of the mean equation should be entered in the dependent variable
edit box. Enter the specification by listing the dependent variable followed by the
regressors. The constant term C should also be included. If your specification
includes an ARCH-M term (see later in this chapter), you should click on the

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Modelling volatility and correlation

Screenshot 9.1

Estimating a GARCH-type model

appropriate button in the upper RHS of the dialog box to select the conditional
standard deviation, the conditional variance, or the log of the conditional variance.
The variance equation

The edit box labelled Variance regressors is where variables that are to be included
in the variance specification should be listed. Note that EViews will always include
a constant in the conditional variance, so that it is not necessary to add C to the
variance regressor list. Similarly, it is not necessary to include the ARCH or
GARCH terms in this box as they will be dealt with in other parts of the dialog
box. Instead, enter here any exogenous variables or dummies that you wish to
include in the conditional variance equation, or (as is usually the case), just leave
this box blank.
Variance and distribution specification

Under the Variance and distribution Specification label, choose the number of
ARCH and GARCH terms. The default is to estimate with one ARCH and one
GARCH term (i.e. one lag of the squared errors and one lag of the conditional
variance, respectively). To estimate the standard GARCH model, leave the default

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9.9 Estimation of ARCH/GARCH models

Screenshot 9.2

437

GARCH model estimation options

GARCH/TARCH. The other entries in this box describe more complicated

variants of the standard GARCH specification, which are described in later sections
of this chapter.
Estimation options

EViews provides a number of optional estimation settings. Clicking on the

Options tab gives the options in screenshot 9.2 to be filled out as required. The
Heteroskedasticity Consistent Covariance option is used to compute the QML
covariances and standard errors using the methods described by Bollerslev and
Wooldridge (1992). This option should be used if you suspect that the residuals
are not conditionally normally distributed. Note that the parameter estimates will
be (virtually) unchanged if this option is selected; only the estimated covariance
matrix will be altered.
The log-likelihood functions for ARCH models are often not well behaved
so that convergence may not be achieved with the default estimation settings. It
is possible in EViews to select the iterative algorithm (Marquardt, BHHH/Gauss
Newton), to change starting values, to increase the maximum number of iterations or to adjust the convergence criteria. For example, if convergence is not

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