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Distributional tests in multivariate dynamic models with Normal and Student t innovations

Listed author(s):
  • Javier Mencía

    ()

    (Banco de España)

  • Enrique Sentana

    ()

    (CEMFI)

We derive Lagrange Multiplier and Likelihood Ratio specifi cation tests for the null hypotheses of multivariate normal and Student t innovations using the Generalised Hyperbolic distribution as our alternative hypothesis. We decompose the corresponding Lagrange Multiplier-type tests into skewness and kurtosis components, from which we obtain more powerful one-sided Kuhn-Tucker versions that are equivalent to the Likelihood Ratio test, whose asymptotic distribution we provide. We conduct detailed Monte Carlo exercises to study our proposed tests in finite samples. Finally, we present an empirical application to ten US sectoral stock returns, which indicates that their conditional distribution is mildly asymmetric and strongly leptokurtic.

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File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/09/Fic/dt0929e.pdf
File Function: First version, December 2009
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Paper provided by Banco de España & Working Papers Homepage in its series Working Papers with number 0929.

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Length: 64 pages
Date of creation: Dec 2009
Handle: RePEc:bde:wpaper:0929
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Web page: http://www.bde.es/bde/en/secciones/informes/Publicaciones_se/docs/
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