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Testing Constancy of the Error Covariance Matrix in Vector Models against Parametric Alternatives using a Spectral Decomposition

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Author Info

  • Yukai Yang

    ()
    (Université catholique de Louvain)

Abstract

I consider multivariate (vector) time series models in which the error covariance matrix may be time-varying. I derive a test of constancy of the error covariance matrix against the alternative that the covariance matrix changes over time. I design a new family of Lagrange-multiplier tests against the alternative hypothesis that the innovations are time-varying according to several parametric specifications. I investigate the size and power properties of these tests and find that the test with smooth transition specification has satisfactory size properties. The tests are informative and may suggest to consider multivariate volatility modelling.

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File URL: ftp://ftp.econ.au.dk/creates/rp/14/rp14_11.pdf
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Bibliographic Info

Paper provided by School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2014-11.

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Length: 26
Date of creation: 04 Apr 2014
Date of revision:
Handle: RePEc:aah:create:2014-11

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Web page: http://www.econ.au.dk/afn/

Related research

Keywords: Covariance constancy; Error covariance structure; Lagrange multiplier test; Spectral decomposition; Auxiliary regression; Model misspecification; Monte Carlo simulation;

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  1. Eklund, Bruno & Terasvirta, Timo, 2007. "Testing constancy of the error covariance matrix in vector models," Journal of Econometrics, Elsevier, vol. 140(2), pages 753-780, October.
  2. Markku Lanne & Helmut Luetkepohl, 2008. "Stock Prices and Economic Fluctuations:A Markov Switching Structural VectorAutoregressive Analysis," CESifo Working Paper Series 2407, CESifo Group Munich.
  3. Marcelo C. Medeiros & Alvaro Veiga, 2003. "Diagnostic Checking in a Flexible Nonlinear Time Series Model," Journal of Time Series Analysis, Wiley Blackwell, vol. 24(4), pages 461-482, 07.
  4. Lanne, Markku & Lütkepohl, Helmut & Maciejowska, Katarzyna, 2010. "Structural vector autoregressions with Markov switching," Journal of Economic Dynamics and Control, Elsevier, vol. 34(2), pages 121-131, February.
  5. Godfrey, Leslie G, 1978. "Testing against General Autoregressive and Moving Average Error Models When the Regressors Include Lagged Dependent Variables," Econometrica, Econometric Society, vol. 46(6), pages 1293-1301, November.
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