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Towering over Babel: Worlds Apart but Acting Together

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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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File URL: http://www.econ.sinica.edu.tw/upload/file/03-a009.2008090210592588.pdf
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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
Date of revision:
Handle: RePEc:sin:wpaper:03-a009
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Web page: http://www.econ.sinica.edu.tw/index.php?foreLang=en
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  1. Eddie Dekel & Drew Fudenberg & David K. Levine, 1999. "Payoff Information and Self-Confirming Equilibrium," Levine's Working Paper Archive 172, David K. Levine.
  2. B. Douglas Bernheim & Michael D. Whinston, 1997. "Incomplete Contracts and Strategic Ambiguity," Harvard Institute of Economic Research Working Papers 1787, Harvard - Institute of Economic Research.
  3. Ehud Kalai & Ehud Lehrer, 1990. "Rational Learning Leads to Nash Equilibrium," Discussion Papers 925, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  4. Martin J Osborne & Ariel Rubinstein, 2009. "A Course in Game Theory," Levine's Bibliography 814577000000000225, UCLA Department of Economics.
  5. Dekel, Eddie & Fudenberg, Drew, 1990. "Rational behavior with payoff uncertainty," Journal of Economic Theory, Elsevier, vol. 52(2), pages 243-267, December.
  6. Fudenberg, Drew & Tirole, Jean, 1991. "Perfect Bayesian equilibrium and sequential equilibrium," Journal of Economic Theory, Elsevier, vol. 53(2), pages 236-260, April.
  7. Drew Fudenberg & David K. Levine, 1993. "Self-Confirming Equilibrium," Levine's Working Paper Archive 2147, David K. Levine.
  8. Vincent P. Crawford, 2003. "Lying for Strategic Advantage: Rational and Boundedly Rational Misrepresentation of Intentions," American Economic Review, American Economic Association, vol. 93(1), pages 133-149, March.
  9. Levine, David & Dekel, Eddie & Fudenberg, Drew, 2002. "Subjective Uncertainty Over Behavior Strategies: A Correction," Scholarly Articles 3200611, Harvard University Department of Economics.
  10. Aumann, Robert & Brandenburger, Adam, 1995. "Epistemic Conditions for Nash Equilibrium," Econometrica, Econometric Society, vol. 63(5), pages 1161-80, September.
  11. Asheim, Geir B. & Perea, Andres, 2005. "Sequential and quasi-perfect rationalizability in extensive games," Games and Economic Behavior, Elsevier, vol. 53(1), pages 15-42, October.
  12. D. B. Bernheim, 2010. "Rationalizable Strategic Behavior," Levine's Working Paper Archive 514, David K. Levine.
  13. Grossman, Sanford J. & Hart, Oliver D., 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Scholarly Articles 3450060, Harvard University Department of Economics.
  14. Rubinstein, Ariel, 1991. "Comments on the Interpretation of Game Theory," Econometrica, Econometric Society, vol. 59(4), pages 909-24, July.
  15. Fudenberg, Drew & Kreps, David M., 1995. "Learning in extensive-form games I. Self-confirming equilibria," Games and Economic Behavior, Elsevier, vol. 8(1), pages 20-55.
  16. Oliver Hart & John Moore, 1985. "Incomplete Contracts and Renegotiation," Working papers 367, Massachusetts Institute of Technology (MIT), Department of Economics.
  17. Joseph Greenberg, 2000. "The Right to Remain Silent," Theory and Decision, Springer, vol. 48(2), pages 193-204, March.
  18. Kreps, David M., 1990. "Game Theory and Economic Modelling," OUP Catalogue, Oxford University Press, number 9780198283812, March.
  19. Pearce, David G, 1984. "Rationalizable Strategic Behavior and the Problem of Perfection," Econometrica, Econometric Society, vol. 52(4), pages 1029-50, July.
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