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Detecting Misspecifications in Autoregressive Conditional Duration Models

  • Yongmiao Hong

    ()

    (Cornell University)

  • Yoon-Jin Lee

    ()

    (Indiana University Bloomington)

We propose a new class of specification tests for Autoregressive Conditional Duration (ACD) models. Both linear and nonlinear ACD models are covered, and standardized innovations can have time-varying conditional dispersion and higher order conditional moments of unknown form. No specific estimation method is required, and the tests have a convenient null asymptotic N(0,1) distribution. To reduce the impact of parameter estimation uncertainty in finite samples, we adopt Wooldridge's (1990a) device to our context and justify its validity. Simulation studies show that the finite sample correction gives better sizes in finite samples and are robust to parameter estimation uncertainty. And, it is important to take into account time-varying conditional dispersion and higher order conditional moments in standardized innovations; failure to do so can cause strong overrejection of a correctly specified ACD model. The proposed tests have reasonable power against a variety of popular linear and nonlinear ACD alternatives.

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File URL: http://www.iub.edu/~caepr/RePEc/PDF/2007/CAEPR2007-019.pdf
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Paper provided by Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington in its series Caepr Working Papers with number 2007-019.

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Length: 33 pages
Date of creation: Sep 2007
Date of revision:
Handle: RePEc:inu:caeprp:2007019
Contact details of provider: Postal: 812-855-1021
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Web page: http://www.iub.edu/~caepr
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  1. Li, W. K. & Yu, Philip L. H., 2003. "On the residual autocorrelation of the autoregressive conditional duration model," Economics Letters, Elsevier, vol. 79(2), pages 169-175, May.
  2. Wooldridge, Jeffrey M., 1990. "A Unified Approach to Robust, Regression-Based Specification Tests," Econometric Theory, Cambridge University Press, vol. 6(01), pages 17-43, March.
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  4. Meitz, Mika & Teräsvirta, Timo, 2004. "Evaluating models of autoregressive conditional duration," SSE/EFI Working Paper Series in Economics and Finance 557, Stockholm School of Economics, revised 13 Dec 2004.
  5. Marcelo Fernandes & Joachim Grammig, 2000. "Non-Parametric Specification Tests For Conditional Duration Models," Computing in Economics and Finance 2000 40, Society for Computational Economics.
  6. Bierens, Herman J., 1982. "Consistent model specification tests," Journal of Econometrics, Elsevier, vol. 20(1), pages 105-134, October.
  7. Wooldridge, Jeffrey M., 1990. "An encompassing approach to conditional mean tests with applications to testing nonnested hypotheses," Journal of Econometrics, Elsevier, vol. 45(3), pages 331-350.
  8. Joann Jasiak, 1996. "Persistence in Intertrade Durations," Working Papers 1999_8, York University, Department of Economics, revised Mar 1999.
  9. Nikolaus Hautsch, 2006. "Testing the Conditional Mean Function of Autoregressive Conditional Duration Models," FRU Working Papers 2006/06, University of Copenhagen. Department of Economics. Finance Research Unit.
  10. Diebold, Francis X & Rudebusch, Glenn D, 1990. "A Nonparametric Investigation of Duration Dependence in the American Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 98(3), pages 596-616, June.
  11. Stinchcombe, Maxwell B. & White, Halbert, 1998. "Consistent Specification Testing With Nuisance Parameters Present Only Under The Alternative," Econometric Theory, Cambridge University Press, vol. 14(03), pages 295-325, June.
  12. Hong, Yongmiao, 1996. "Consistent Testing for Serial Correlation of Unknown Form," Econometrica, Econometric Society, vol. 64(4), pages 837-64, July.
  13. Engle, Robert F & Lilien, David M & Robins, Russell P, 1987. "Estimating Time Varying Risk Premia in the Term Structure: The Arch-M Model," Econometrica, Econometric Society, vol. 55(2), pages 391-407, March.
  14. BAUWENS, Luc & GIOT, Pierre & GRAMMIG, Joachim & VEREDAS, David, . "A comparison of financial duration models via density forecasts," CORE Discussion Papers RP -1746, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  15. Chou, Ray Yeutien, 2005. "Forecasting Financial Volatilities with Extreme Values: The Conditional Autoregressive Range (CARR) Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(3), pages 561-82, June.
  16. Fernandes, Marcelo & Grammig, Joachim, 2002. "A Family of Autoregressive Conditional Duration Models," Economics Working Papers (Ensaios Economicos da EPGE) 440, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  17. Joel L. Horowitz, 2003. "Bootstrap Methods for Markov Processes," Econometrica, Econometric Society, vol. 71(4), pages 1049-1082, 07.
  18. Diebold, Francis X & Gunther, Todd A & Tay, Anthony S, 1998. "Evaluating Density Forecasts with Applications to Financial Risk Management," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 863-83, November.
  19. Hong, Yongmiao & Lee, Yoon-Jin, 2007. "An Improved Generalized Spectral Test For Conditional Mean Models In Time Series With Conditional Heteroskedasticity Of Unknown Form," Econometric Theory, Cambridge University Press, vol. 23(01), pages 106-154, February.
  20. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March.
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  22. Wooldridge, Jeffrey M., 1991. "On the application of robust, regression- based diagnostics to models of conditional means and conditional variances," Journal of Econometrics, Elsevier, vol. 47(1), pages 5-46, January.
  23. Zhang, Michael Yuanjie & Russell, Jeffrey R. & Tsay, Ruey S., 2001. "A nonlinear autoregressive conditional duration model with applications to financial transaction data," Journal of Econometrics, Elsevier, vol. 104(1), pages 179-207, August.
  24. Drost, F.C. & Werker, B.J.M., 2004. "Semiparametric duration models," Other publications TiSEM a1895e3e-f720-454b-9613-f, Tilburg University, School of Economics and Management.
  25. Nikolaus Hautsch, 2003. "Assessing the Risk of Liquidity Suppliers on the Basis of Excess Demand Intensities," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 1(2), pages 189-215.
  26. repec:cup:etheor:v:6:y:1990:i:1:p:17-43 is not listed on IDEAS
  27. Easley, David & O'Hara, Maureen, 1992. " Time and the Process of Security Price Adjustment," Journal of Finance, American Finance Association, vol. 47(2), pages 576-605, June.
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