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SPECIFICATION TESTS FOR MULTIPLICATIVE ERROR MODELS

Published online by Cambridge University Press:  23 February 2016

Indeewara Perera  and
Mervyn J. Silvapulle
Indeewara Perera*
Affiliation:
Monash University
Mervyn J. Silvapulle*
Affiliation:
Monash University
*
*Please address correspondence to: Indeewara Perera/Mervyn Silvapulle, Department of Econometrics and Business Statistics, Monash Business School, Monash University, P.O. Box 197, Caulfield East, Australia 3145; e-mail: indeewara.perera@monash.edu; mervyn.silvapulle@monash.edu.
*Please address correspondence to: Indeewara Perera/Mervyn Silvapulle, Department of Econometrics and Business Statistics, Monash Business School, Monash University, P.O. Box 197, Caulfield East, Australia 3145; e-mail: indeewara.perera@monash.edu; mervyn.silvapulle@monash.edu.
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Abstract

The family of multiplicative error models is important for studying non-negative variables such as realized volatility, trading volume, and duration between consecutive financial transactions. Methods are developed for testing the parametric specification of a multiplicative error model, which consists of separate parametric models for the conditional mean and the error distribution. The same method can also be used for testing the specification of the error distribution provided the conditional mean is correctly specified. A bootstrap method is proposed for computing the p-values of the tests and is shown to be consistent. The proposed tests have nontrivial asymptotic power against a class of O(n −1/2)-local alternatives. The tests performed well in a simulation study, and they are illustrated using a data example on realized volatility.

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Type
ARTICLES
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Econometric Theory , Volume 33 , Issue 2 , April 2017 , pp. 413 - 438
Copyright
Copyright © Cambridge University Press 2016 

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