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Generalized LM tests for functional form and heteroscedasticity

Zhenlin Yang () and Y. K. Tse ()

Econometrics Journal, 2008, vol. 11, issue 2, 349-376

Abstract: We present a generalized LM test of heteroscedasticity allowing the presence of data transformation and a generalized LM test of functional form allowing the presence of heteroscedasticity. Both generalizations are meaningful as non-normality and heteroscedasticity are common in economic data. A joint test of functional form and heteroscedasticity is also given. These tests are further "studentized" to account for possible excess skewness and kurtosis of the errors in the model. All tests are easy to implement. They are based on the expected information and are shown to possess excellent finite sample properties. Several related tests are also discussed and their finite sample performances assessed. We found that our newly proposed tests significantly outperform the others, in particular in the cases where the errors are non-normal. Copyright © 2008 The Author(s). Journal compilation © Royal Economic Society 2008

Date: 2008
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