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Testing linearity using power transforms of regressors

Yae In Baek, Jin Seo Cho () and Peter Phillips

Journal of Econometrics, 2015, vol. 187, issue 1, 376-384

Abstract: We develop a method of testing linearity using power transforms of regressors, allowing for stationary processes and time trends. The linear model is a simplifying hypothesis that derives from the power transform model in three different ways, each producing its own identification problem. We call this modeling difficulty the trifold identification problem and show that it may be overcome using a test based on the quasi-likelihood ratio (QLR) statistic. More specifically, the QLR statistic may be approximated under each identification problem and the separate null approximations may be combined to produce a composite approximation that embodies the linear model hypothesis. The limit theory for the QLR test statistic depends on a Gaussian stochastic process. In the important special case of a linear time trend regressor and martingale difference errors asymptotic critical values of the test are provided. Test power is analyzed and an empirical application to crop-yield distributions is provided. The paper also considers generalizations of the Box–Cox transformation, which are associated with the QLR test statistic.

Keywords: Box–Cox transform; Gaussian stochastic process; Neglected nonlinearity; Power transformation; Quasi-likelihood ratio test; Trend exponent; Trifold identification problem (search for similar items in EconPapers)
JEL-codes: C12 C18 C46 C52 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (27)

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Working Paper: Testing Linearity Using Power Transforms of Regressors (2015) Downloads
Working Paper: Testing Linearity Using Power Transforms of Regressors (2013) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:187:y:2015:i:1:p:376-384

DOI: 10.1016/j.jeconom.2015.03.041

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Journal of Econometrics is currently edited by T. Amemiya, A. R. Gallant, J. F. Geweke, C. Hsiao and P. M. Robinson

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