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Testing Dependence Among Serially Correlated Multi-category Variables

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  • Pesaran, M.H.
  • Timmermann, A.

Abstract

The contingency table literature on tests for dependence among discrete multi-category variables assume that draws are independent, and there are no tests that account for serial dependencies ? a problem that is particularly important in economics and finance. This paper proposes a new test of independence based on the maximum canonical correlation between pairs of discrete variables. We also propose a trace canonical correlation test using dynamically augmented reduced rank regressions or an iterated weighting method in order to account for serial dependence. Such tests are useful, for example, when testing for predictability of one sequence of discrete random variables by means of another sequence of discrete random variables as in tests of market timing skills or business cycle analysis. The proposed tests allow for an arbitrary number of categories, are robust in the presence of serial dependencies and are simple to implement using multivariate regression methods.

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Bibliographic Info

Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0648.

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Length: 33
Date of creation: Jul 2006
Date of revision:
Handle: RePEc:cam:camdae:0648

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Keywords: Contingency Tables; Canonical Correlations; Serial Dependence; Tests of Predictability;

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  16. Gerard, Patrick D. & Schucany, William R., 2007. "An enhanced sign test for dependent binary data with small numbers of clusters," Computational Statistics & Data Analysis, Elsevier, vol. 51(9), pages 4622-4632, May.
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  21. Phillips, Peter C.B. & Sun, Yixiao & Jin, Sainan, 2004. "Spectral Density Estimation and Robust Hypothesis Testing Using Steep Origin Kernels Without Truncation," University of California at San Diego, Economics Working Paper Series qt6mf9q2rt, Department of Economics, UC San Diego.
  22. Robert B. Davies, 2002. "Hypothesis testing when a nuisance parameter is present only under the alternative: Linear model case," Biometrika, Biometrika Trust, vol. 89(2), pages 484-489, June.
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