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Finite sample properties of a simple LM test for neglected nonlinearity in error‐correcting regression equations

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  • N. R. Swanson

Abstract

The finite sample properties of LM‐type linearity tests based on the discussion in Granger (1995) are examined. The tests are constructed based on regression models which contain stationary linear and nonlinear functions of nonstationary variables, thus generalizing standard linear cointegrating equations. Power and size simulations are promising, suggesting that the tests are worthy of further examination, and an illustrative empirical example shows that some form of nonlinear error‐correction may be useful for explaining the evolution of U.S. money stock in a simple vector autoregression framework.

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  • N. R. Swanson, 1999. "Finite sample properties of a simple LM test for neglected nonlinearity in error‐correcting regression equations," Statistica Neerlandica, Netherlands Society for Statistics and Operations Research, vol. 53(1), pages 76-95, March.
    • Handle: RePEc:bla:stanee:v:53:y:1999:i:1:p:76-95
    DOI: 10.1111/1467-9574.00099
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    Cited by:

    1. Chen, Shiyi & Chng, Michael T. & Liu, Qingfu, 2021. "The implied arbitrage mechanism in financial markets," Journal of Econometrics, Elsevier, vol. 222(1), pages 468-483.
    2. Robert Sollis, 2005. "Evidence on purchasing power parity from univariate models: the case of smooth transition trend-stationarity," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(1), pages 79-98.
    3. He, Dequan & Holt, Matthew T., 2004. "Efficiency Of Forest Commodity Futures Markets," 2004 Annual meeting, August 1-4, Denver, CO 20344, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    4. Hong, Seung Hyun & Phillips, Peter C. B., 2010. "Testing Linearity in Cointegrating Relations With an Application to Purchasing Power Parity," Journal of Business & Economic Statistics, American Statistical Association, vol. 28(1), pages 96-114.

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