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Testing for unobserved heterogeneity in exponential and Weibull duration models

  • Cho, Jin Seo
  • White, Halbert

We examine the use of the likelihood ratio (LR) statistic to test for unobserved heterogeneity in duration models, based on mixtures of exponential or Weibull distributions. We consider both the uncensored and censored duration cases. The asymptotic null distribution of the LR test statistic is not the standard chi-square, as the standard regularity conditions do not hold. Instead, there is a nuisance parameter identified only under the alternative, and a null parameter value on the boundary of the parameter space, as in Cho and White (2007a). We accommodate these and provide methods delivering consistent asymptotic critical values. We conduct a number of Monte Carlo simulations, comparing the level and power of the LR test statistic to an information matrix (IM) test due to Chesher (1984) and Lagrange multiplier (LM) tests of Kiefer (1985) and Sharma (1987). Our simulations show that the LR test statistic generally outperforms the IM and LM tests. We also revisit the work of van den Berg and Ridder (1998) on unemployment durations and of Ghysels et al. (2004) on interarrival times between stock trades, and, as it turns out, affirm their original informal inferences.

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Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 157 (2010)
Issue (Month): 2 (August)
Pages: 458-480

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Handle: RePEc:eee:econom:v:157:y:2010:i:2:p:458-480
Contact details of provider: Web page: http://www.elsevier.com/locate/jeconom

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  1. James E. Prieger, 2003. "Conditional Moment Tests for Parametric Duration Models," Working Papers 010, University of California, Davis, Department of Economics.
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  9. Ghysels, Eric & Gourieroux, Christian & Jasiak, Joann, 2004. "Stochastic volatility duration models," Journal of Econometrics, Elsevier, vol. 119(2), pages 413-433, April.
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  15. Berg, G.J. & Ridder, G., 1993. "An empirical equilibrium search model of the labour market," Serie Research Memoranda 0039, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.
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