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Sign-based specification tests for martingale difference with conditional heteroscedasity

Author

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  • Chen, Min
  • Zhu, Ke

Abstract

This article proposes Cramer-von Mises (CM) and Kolmogrove-Smirnov (KS) test statistics based on the signs of a time series to test the null hypothesis that the series is a martingale difference sequence (MDS) with conditional heteroscedasity. Both of test statistics allowing for heavy-tailedness, non-stationarity, and nonlinear serial dependence of unknown forms, are easy-to-implement. Unlike the sign-based variance-ratio test in Wright (2000), our sign-based CM and KS tests have no need to select the lag. Unlike other often used specification tests for MDS, our sign-based CM and KS tests are robust and have exact distributions which can be simulated easily. Simulation studies and applications further demonstrate the importance of our sign-based CM and KS tests.

Suggested Citation

  • Chen, Min & Zhu, Ke, 2014. "Sign-based specification tests for martingale difference with conditional heteroscedasity," MPRA Paper 56347, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:56347
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    File URL: https://mpra.ub.uni-muenchen.de/56347/1/MPRA_paper_56347.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Conditional heteroscedasity; Cramer-von Mises test; Kolmogrove-Smirnov test; Martingale difference; Robustness.;

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General

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