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Econometric Time Series Specification Testing in a Class of Multiplicative Error Models

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  • Patrick W Saart
  • Jiti Gao
  • Nam Hyun Kim

Abstract

In recent years, analysis of financial time series has focused largely on data related to market trading activity. Apart from modelling the conditional variance of returns within the GARCH family of models, presently attention has also been devoted to other market variables, especially volumes, number of trades and durations. The financial econometrics literature has focused on Multiplicative Error Models (MEMs), which are considered particularly suited for modelling certain financial variables. The paper establishes an econometric specification approach for MEMs. In the literature, several procedures are available to perform specification testing for MEMs, but the proposed specification testing method is particularly useful within the context of the MEMs of financial duration. The paper makes a number of important theoretical contributions. Both the proposed specification testing method and the associated theory are established and evaluated through simulations and real data examples.

Suggested Citation

  • Patrick W Saart & Jiti Gao & Nam Hyun Kim, 2014. "Econometric Time Series Specification Testing in a Class of Multiplicative Error Models," Monash Econometrics and Business Statistics Working Papers 1/14, Monash University, Department of Econometrics and Business Statistics.
    • Handle: RePEc:msh:ebswps:2014-1
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    File URL: http://business.monash.edu/econometrics-and-business-statistics/research/publications/ebs/wp01-14.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Financial duration process; Nonnegative time series; Nonparametric kernel estimation; Semiparametric mixture model;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis; Optimal Timing Strategies
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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