Time-varying parameters: New test tailored to applications in finance and macroeconomics

Russell Davidson and Niels S. Grønborg ()
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Niels S. Grønborg: Aarhus University and CREATES, Postal: Department of Economics and Business Economics, Fuglesangs Allé 4, 8210 Aarhus V, Denmark

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: Many economic theories imply a linear relationship with constant parameters between financial or macroeconomic variables. While the linear model with constant parameters is often disputed in the literature, this model specification is rarely tested. This paper proposes a new and intuitively appealing test for model specification tailored for applications in finance and macroeconomics. Importantly, the test allows for autocorrelation, which is often present in these applications. We demonstrate impressive properties of the test in a realistic simulation study and obtain important insights from empirical applications.

Keywords: Nonparametric estimator; Time-varying parameters; Bootstrap; Finance; Macroeconomics (search for similar items in EconPapers)
JEL-codes: C12 C14 C32 E61 G12 (search for similar items in EconPapers)
Pages: 28
Date: 2018-08-14
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Persistent link: https://EconPapers.repec.org/RePEc:aah:create:2018-22

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