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Diagnostic checking of Markov multiplicative error models

Bin Guo and Shuo Li

Economics Letters, 2018, vol. 170, issue C, 139-142

Abstract: In a multiplicative error model (MEM), correct specification of the conditional mean function and that of the error distribution are of crucial importance. In this paper, we propose a test that can jointly check the two specifications in an MEM admitting a Markov structure. The proposed test is constructed by comparing the nonparametric kernel estimator with a parametric estimator of the marginal density function. Its asymptotic properties under the null and the alternative hypotheses are established. We propose a parametric bootstrap procedure to approximate the null distribution. A simulation study shows that the proposed test enjoys nice finite sample performance, while a real data example demonstrates its practical merit.

Keywords: Multiplicative error model; Specification test; Time series (search for similar items in EconPapers)
JEL-codes: C12 C22 (search for similar items in EconPapers)
Date: 2018
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