Extremal Dependence-Based Specification Testing of Time Series

Yannick Hoga

Journal of Business & Economic Statistics, 2023, vol. 41, issue 4, 1274-1287

Abstract: We propose a specification test for conditional location–scale models based on extremal dependence properties of the standardized residuals. We do so comparing the left-over serial extremal dependence—as measured by the pre-asymptotic tail copula—with that arising under serial independence at different lags. Our main theoretical results show that the proposed Portmanteau-type test statistics have nuisance parameter-free asymptotic limits. The test statistics are easy to compute, as they only depend on the standardized residuals, and critical values are likewise easily obtained from the limiting distributions. This contrasts with some extant tests (based, e.g., on autocorrelations of squared residuals), where test statistics depend on the parameter estimator of the model and critical values may need to be bootstrapped. We show that our tests perform well in simulations. An empirical application to S&P 500 constituents illustrates that our tests can uncover violations of residual serial independence that are not picked up by standard autocorrelation-based specification tests, yet are relevant when the model is used for, for example, risk forecasting.

Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:taf:jnlbes:v:41:y:2023:i:4:p:1274-1287

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DOI: 10.1080/07350015.2022.2120483

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