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Towering over Babel: Worlds Apart but Acting Together

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Abstract

In 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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Paper provided by Institute of Economics, Academia Sinica, Taipei, Taiwan in its series IEAS Working Paper : academic research with number 03-A009.

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Length: 39 pages
Date of creation: Dec 2003
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Handle: RePEc:sin:wpaper:03-a009

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  1. Eddie Dekel & Drew Fudenberg & David K. Levine, . "Payoff Information and Self-Confirming Equilibrium," ELSE working papers, ESRC Centre on Economics Learning and Social Evolution 040, ESRC Centre on Economics Learning and Social Evolution.
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  6. Eddie Dekel & Drew Fudenberg & David K Levine, 2001. "Subjective Uncertainty Over Behavior Strategies: A Correction," Levine's Working Paper Archive 7571, David K. Levine.
  7. Grossman, Sanford J & Hart, Oliver, 1985. "The Cost and Benefits of Ownership: A Theory of Vertical and Lateral Integration," CEPR Discussion Papers, C.E.P.R. Discussion Papers 70, C.E.P.R. Discussion Papers.
  8. Vincent P. Crawford, 2003. "Lying for Strategic Advantage: Rational and Boundedly Rational Misrepresentation of Intentions," American Economic Review, American Economic Association, American Economic Association, vol. 93(1), pages 133-149, March.
  9. Pearce, David G, 1984. "Rationalizable Strategic Behavior and the Problem of Perfection," Econometrica, Econometric Society, Econometric Society, vol. 52(4), pages 1029-50, July.
  10. Drew Fudenberg & Eddie Dekel, 1987. "Rational Behavior with Payoff Uncertainty," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 471, Massachusetts Institute of Technology (MIT), Department of Economics.
  11. Kreps, David M., 1990. "Game Theory and Economic Modelling," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198283812, October.
  12. Rubinstein, Ariel, 1991. "Comments on the Interpretation of Game Theory," Econometrica, Econometric Society, Econometric Society, vol. 59(4), pages 909-24, July.
  13. Aumann, Robert & Brandenburger, Adam, 1995. "Epistemic Conditions for Nash Equilibrium," Econometrica, Econometric Society, Econometric Society, vol. 63(5), pages 1161-80, September.
  14. Fudenberg, Drew & Kreps, David M., 1995. "Learning in extensive-form games I. Self-confirming equilibria," Games and Economic Behavior, Elsevier, Elsevier, vol. 8(1), pages 20-55.
  15. Joseph Greenberg, 2000. "The Right to Remain Silent," Theory and Decision, Springer, Springer, vol. 48(2), pages 193-204, March.
  16. Asheim, Geir B. & Perea, Andres, 2005. "Sequential and quasi-perfect rationalizability in extensive games," Games and Economic Behavior, Elsevier, Elsevier, vol. 53(1), pages 15-42, October.
  17. Bernheim, B Douglas, 1984. "Rationalizable Strategic Behavior," Econometrica, Econometric Society, Econometric Society, vol. 52(4), pages 1007-28, July.
  18. Fudenberg, Drew & Tirole, Jean, 1991. "Perfect Bayesian equilibrium and sequential equilibrium," Journal of Economic Theory, Elsevier, Elsevier, vol. 53(2), pages 236-260, April.
  19. Fudenberg, Drew & Levine, David K, 1993. "Self-Confirming Equilibrium," Econometrica, Econometric Society, Econometric Society, vol. 61(3), pages 523-45, May.
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  1. Asheim, Geir B. & Perea, Andres, 2005. "Sequential and quasi-perfect rationalizability in extensive games," Games and Economic Behavior, Elsevier, Elsevier, vol. 53(1), pages 15-42, October.

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