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Alternative Nonnested Specification Tests of Time Series Investment Models

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  • Ben S. Bernanke
  • Henning Bohn
  • Peter C. Reiss

Abstract

This paper develops and compares nonnested hypothesis tests for linear regression models with first-order serially correlated errors. It extends the nonnested testing procedures of Pesaran, Fisher and McAleer, and Davidson and MacKinnon, and compares their performance on four conventional models of aggregate investment demand using quarterly U.S. investment data from 1951:1 to 1983:IV. The data and the nonnested hypothesis tests initially indicate that no model is correctly specified, and that the tests are occasionally intransitive in their assessments. Before rejecting these conventional models of investment demand, we go on to investigate the small sample properties of these different nonnested test procedures through a series of monte carlo studies. These investigations demonstrate that when there is significant serial correlation, there are systematic finite sample biases in the nominal size and power of these test statistics. The direction of the bias is toward rejection of the null model, although it varies considerably by the type of test and estimation technique. After revising our critical levels for this finite sample bias, we conclude that the accelerator model of equipment investment cannot be rejected by any of the other alternatives.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Technical Working Papers with number 0049.

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Date of creation: Jun 1985
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Publication status: published as Bernanke, Bohn, and Reiss. "Alternative Nonnested Specification Tests of Time Series Investment Models," in Journal of Econometrics, Vol. 37, No. 2, March 1988, pp. 293-326.
Handle: RePEc:nbr:nberte:0049

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  1. Breusch, T.S. & Pagan, A.R., . "The Lagrange multiplier test and its applications to model specification in econometrics," CORE Discussion Papers RP, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) -412, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Davidson, Russell & MacKinnon, James G, 1981. "Several Tests for Model Specification in the Presence of Alternative Hypotheses," Econometrica, Econometric Society, Econometric Society, vol. 49(3), pages 781-93, May.
  3. Bean, Charles R, 1981. "An Econometric Model of Manufacturing Investment in the UK," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 91(361), pages 106-21, March.
  4. Chow, Gregory C & Lin, An-loh, 1971. "Best Linear Unbiased Interpolation, Distribution, and Extrapolation of Time Series by Related Series," The Review of Economics and Statistics, MIT Press, vol. 53(4), pages 372-75, November.
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