I am trying to run a GARCH model with more than one explanatory variables but I am facing a lot of problems and doubts.
First, i would like to know how can we properly decide the ARCH and GARCH values to use in the model specification. I have run a GARCH(1,1) and looked to the Variance Equation. Just by looking at that I opt to use a GARCH(2,1) model, but I have no idea if this is the right thing to do.
Secondly, when performing the residuals tests I face a serious problem with auto-correlation. The results of all tests can be seen below:
- -Correlogram Q-Statistics:
- -Correlogram Squared Residuals:
- Histogram Normality Test: