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Evaluating models of autoregressive conditional duration

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Author Info

  • Meitz, Mika

    ()
    (Dept. of Economic Statistics, Stockholm School of Economics)

  • Teräsvirta, Timo

    ()
    (Dept. of Economic Statistics, Stockholm School of Economics)

Abstract

This paper contains two novelties. First, a unified framework for testing and evaluating the adequacy of an estimated autoregressive conditional duration (ACD) model is presented. Second, two new classes of ACD models, the smooth transition ACD model and the time-varying ACD model, are introduced and their properties discussed. A number of new misspecification tests for the ACD class of models are introduced. They are Lagrange multiplier and Lagrange multiplier type tests against general forms of additive and multiplicative misspecification of the conditional mean function. These forms include tests against higher-order models, tests of no remaining ACD in the standardized durations, as well as tests of linearity and parameter constancy. In addition to its generality, the advantage of this testing approach is its ease of application, since all the resulting asymptotic null distributions are standard. The finite sample properties of the tests are investigated by simulation. A general observation is that the tests are well-sized and have good power. Versions of the test statistics robust to deviations from distributional assumptions other than those being explicitly tested are also given. The smooth transition and time-varying ACD models are introduced, their main properties are examined, and they serve as alternatives in the tests of linearity and parameter constancy. Finally, the tests are applied to ACD models of the IBM stock traded at the New York Stock Exchange.

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Bibliographic Info

Paper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 557.

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Length: 36 pages
Date of creation: 08 Mar 2004
Date of revision: 13 Dec 2004
Publication status: Published in Journal of Business and Economic Statistics, 2006, pages 104-124.
Handle: RePEc:hhs:hastef:0557

Note: The published version can be obtained through the official journal website: http://www.amstat.org/publications/jbes/
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Postal: The Economic Research Institute, Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden
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Related research

Keywords: ACD model; Model misspecification test; Lagrange multiplier test; Smooth transition ACD model; Nonlinear time series; Parameter constancy;

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References

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  1. Fernandes, Marcelo & Grammig, Joachim, 2005. "Nonparametric specification tests for conditional duration models," Journal of Econometrics, Elsevier, vol. 127(1), pages 35-68, July.
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  10. Joachim Grammig & Kai-Oliver Maurer, 2000. "Non-monotonic hazard functions and the autoregressive conditional duration model," Econometrics Journal, Royal Economic Society, vol. 3(1), pages 16-38.
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  12. Wooldridge, Jeffrey M., 1990. "A Unified Approach to Robust, Regression-Based Specification Tests," Econometric Theory, Cambridge University Press, vol. 6(01), pages 17-43, March.
  13. Robert F. Engle & Jeffrey R. Russell, 1998. "Autoregressive Conditional Duration: A New Model for Irregularly Spaced Transaction Data," Econometrica, Econometric Society, vol. 66(5), pages 1127-1162, September.
  14. Hong, Yongmiao & Lee, Tae-Hwy, 2003. "Diagnostic Checking For The Adequacy Of Nonlinear Time Series Models," Econometric Theory, Cambridge University Press, vol. 19(06), pages 1065-1121, December.
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