EconPapers    
Economics at your fingertips  
 

Testing weak exogeneity in multiplicative error models

Kul B. Luintel and Yongdeng Xu ()

Quantitative Finance, 2017, vol. 17, issue 10, 1617-1630

Abstract: Empirical market microstructure literature widely employs the non-linear and non-Gaussian multiplicative error class of models (MEMs) in modelling the dynamics of trading duration and financial marks. It routinely maintains the weak exogeneity of duration vis-à-vis marks in estimations. However, microstructure theory states that trade duration, volume and transaction prices are simultaneously determined. We propose Lagrange-multiplier (LM) tests for weak exogeneity for the MEMs. Our LM tests are extensions of the weak exogeneity tests applicable to VAR or VECM models with Gaussian distributions. Empirical assessments show that (i) weak exogeneity is widely rejected by the data in the MEMs and (ii) the failure of weak exogeneity seriously biases parameter estimates. We hope our tests will be of interest in future empirical applications.

Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://hdl.handle.net/10.1080/14697688.2016.1274045 (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Testing weak exogeneity in multiplicative error models (2013) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:quantf:v:17:y:2017:i:10:p:1617-1630

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RQUF20

Access Statistics for this article

Quantitative Finance is currently edited by Michael Dempster and Jim Gatheral

More articles in Quantitative Finance from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().

 
Page updated 2019-08-23
Handle: RePEc:taf:quantf:v:17:y:2017:i:10:p:1617-1630