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Tests of Functional Form and Heteroscedasticity

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  • Z. L. Yang Y. K. Tse

Abstract

This paper considers tests of misspecification in a heteroscedastic transformation model. We derive Lagrange multiplier (LM) statistics for (i) testing functional form and heteroscedasticity jointly, (ii) testing functional form in the presence of heteroscedasticity, and (iii) testing heteroscedasticity in the presence of data transformation. We present LM statistics based on the expected information matrix. For cases (i) and (ii), this is done assuming the Box-Cox transformation. For case (iii), the test does not depend on whether the functional form is estimated or pre-specified. Small-sample properties of the tests are assessed by Monte Carlo simulation, and comparisons are made with the likelihood ratio test and other versions of LM test. The results show that the expected-information based LM test has the most appropriate finite-sample empirical si

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Paper provided by Econometric Society in its series Econometric Society 2004 Australasian Meetings with number 302.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:ausm04:302

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Keywords: Functional Form; Hetersocedasticity; Lagrange Multiplier Test;

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  1. Russell Davidson & James G. MacKinnon, 1981. "Model Specification Tests Based on Artificial Linear Regressions," Working Papers, Queen's University, Department of Economics 426, Queen's University, Department of Economics.
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  3. Seaks, Terry G & Layson, Stephen K, 1983. "Box-Cox Estimation with Standard Econometric Problems," The Review of Economics and Statistics, MIT Press, vol. 65(1), pages 160-64, February.
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  7. Wallentin, Bo & Agren, Anders, 2002. "Test of heteroscedasticity in a regression model in the presence of measurement errors," Economics Letters, Elsevier, Elsevier, vol. 76(2), pages 205-211, July.
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  15. Godfrey, Leslie G & McAleer, Michael & McKenzie, Colin R, 1988. "Variable Addition and LaGrange Multiplier Tests for Linear and Logarithmic Regression Models," The Review of Economics and Statistics, MIT Press, vol. 70(3), pages 492-503, August.
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  19. Lahiri, Kajal & Egy, Daniel, 1981. "Joint estimation and testing for functional form and heteroskedasticity," Journal of Econometrics, Elsevier, Elsevier, vol. 15(2), pages 299-307, February.
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