I am using the conditional variance from a GARCH(1,1) model as a regressor
(supposed to be a measure of uncertainty) in another regression.
If I undestand correctly, this may create a problem of generated regressors
(Pagan, 1984): inference in the generated regression is generally not valid.
I have to confess that Pagan's paper is too difficult for me, but I could
not find a manual plainly explaining the nature of the problem and the
possible solutions.
Looking at other (applied) papers, I found the following solutions (not
necessarily consistent each other):
-if the generaring regression is correctly specified, don't worry (nice
solution, my favourite!)
-Hypothesis testing on the coefficient of the generated regressor is always
valid, but you can not test hypotheses on the other variables in the
generated regression
-in general, you can use Newey and West standard errors and carry out
inference in the generated regression.
Which is the correct one?
Thanks for any help you can provide.
Mario
University of York
Department of Economics and Related Studies
Heslington
York YO10 5DD
United Kingdom
email: [email protected]
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