A New Test of the Martingale Difference Hypothesis
AbstractIn this paper we propose a new class of tests for the martingale difference hypothesis based on the moment conditions derived by Bierens (1982). In contrast with the existing consistent tests, the proposed test has a standard limiting distribution and is easy to implement. Comparing with the commonly used autocorrelation- and spectrum-based tests, it has power against a much larger class of alternatives that may be serially correlated or uncorrelated. Moreover, this test does not rely on the assumption of conditional homoskedasticity and requires a weaker moment condition. Our simulations confirm that the proposed test is powerful against various linear and nonlinear alternatives and is quite robust to the failure of higher-order moments. Our empirical study on exchange rate returns also shows that the conclusion resulted from the proposed test is different from that of the conventional tests.
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Bibliographic InfoPaper provided by Institute of Economics, Academia Sinica, Taipei, Taiwan in its series IEAS Working Paper : academic research with number 03-A001.
Length: 24 pages
Date of creation: Nov 2003
Date of revision:
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Web page: http://www.econ.sinica.edu.tw/index.php?foreLang=en
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autocorrelation-based test; Bierens’ equivalence result; martingale difference sequence; multivariate exponential distribution; spectrum-based test;
Other versions of this item:
- Kuan Chung-Ming & Lee Wei-Ming, 2004. "A New Test of the Martingale Difference Hypothesis," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 8(4), pages 1-26, December.
- C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
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