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Wild-Bootstrapped Variance Ratio Test for Autocorrelation in the Presence of Heteroskedasticity

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  • Jeong, Jinook
  • Kang, Byunguk

Abstract

The Breusch-Godfrey’s LM test is one of the most popular tests for autocorrelation. However, it has been shown that the LM test may be erroneous when there exist heteroskedastic errors in regression model. Some remedies recently have been proposed by Godfrey and Tremayne (2005) and Shim et al. (2006). This paper suggests wild-bootstrapped variance ratio test for autocorrelation in the presence of heteroskedasticity. We show through a Monte Carlo simulation that our wild-bootstrapped VR test has better small sample properties and is robust to the structure of heteroskedasticity.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 9791.

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Date of creation: Dec 2006
Date of revision: May 2008
Handle: RePEc:pra:mprapa:9791

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Keywords: variance-ratio test; Breusch-Godfrey’s LM test; autocorrelation; heteroskedasticity; wild bootstrap;

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  1. Emmanuel Flachaire, 2001. "The Wild Bootstrap, Tamed at Last," STICERD - Distributional Analysis Research Programme Papers, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE 58, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  2. Emmanuel Flachaire, 2005. "Bootstrapping heteroskedastic regression models: wild bootstrap vs. pairs bootstrap," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00175910, HAL.
  3. Andrew W. Lo & Craig A. MacKinlay, . "The Size and Power of the Variance Ratio Test in Finite Samples: A Monte Carlo Investigation," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 28-87, Wharton School Rodney L. White Center for Financial Research.
  4. Godfrey, Leslie G, 1978. "Testing against General Autoregressive and Moving Average Error Models When the Regressors Include Lagged Dependent Variables," Econometrica, Econometric Society, Econometric Society, vol. 46(6), pages 1293-1301, November.
  5. Joo-Yeon Hyun & Hyeong Ho Mun & Tae-Hwan Kim & Jinook Jeong, 2010. "The effect of a variance shift on the Breusch-Godfrey's LM test," Applied Economics Letters, Taylor & Francis Journals, Taylor & Francis Journals, vol. 17(4), pages 399-404.
  6. Andrew W. Lo, A. Craig MacKinlay, 1988. "Stock Market Prices do not Follow Random Walks: Evidence from a Simple Specification Test," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 1(1), pages 41-66.
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