Generalized Spectral Tests For The Martingale Difference Hypothesis
AbstractThis article proposes a test for the Martingale Difference Hypothesis (MDH) using dependence measures related to the characteristic function. The MDH typically has been tested using the sample autocorrelations or in the spectral domain using the periodogram. Tests based on these statistics are inconsistent against uncorrelated non-martingales processes. Here, we generalize the spectral test of Durlauf (1991) for testing the MDH taking into account linear and nonlinear dependence. Our test considers dependence at all lags and is consistent against general pairwise nonparametric Pitman's local alternatives converging at the parametric rate n^(-1/2), with n the sample size. Furthermore, with our methodology there is no need to choose a lag order, to smooth the data or to formulate a parametric alternative. Our approach can be easily extended to specification testing of the conditional mean of possibly nonlinear models. The asymptotic null distribution of our test depends on the data generating process, so a bootstrap procedure is proposed and theoretically justified. Our bootstrap test is robust to higher order dependence, in particular to conditional heteroskedasticity. A Monte Carlo study examines the finite sample performance of our test and shows that it is more powerful than some competing tests. Finally, an application to the S&P 500 stock index and exchange rates highlights the merits of our approach.
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Bibliographic InfoPaper provided by Universidad Carlos III, Departamento de Estadística y Econometría in its series Statistics and Econometrics Working Papers with number ws035212.
Date of creation: Oct 2003
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Other versions of this item:
- Escanciano, J. Carlos & Velasco, Carlos, 2006. "Generalized spectral tests for the martingale difference hypothesis," Journal of Econometrics, Elsevier, vol. 134(1), pages 151-185, September.
- NEP-ALL-2003-10-28 (All new papers)
- NEP-ECM-2003-10-28 (Econometrics)
- NEP-ETS-2003-10-28 (Econometric Time Series)
- NEP-RMG-2003-10-28 (Risk Management)
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