On the Choice of Instruments in Mixed Frequency Specification Tests

Yun Liu and Yeonwoo Rho

Papers from arXiv.org

Abstract: Time averaging has been the traditional approach to handle mixed sampling frequencies. However, it ignores information possibly embedded in high frequency. Mixed data sampling (MIDAS) regression models provide a concise way to utilize the additional information in high-frequency variables. In this paper, we propose a specification test to choose between time averaging and MIDAS models, based on a Durbin-Wu-Hausman test. In particular, a set of instrumental variables is proposed and theoretically validated when the frequency ratio is large. As a result, our method tends to be more powerful than existing methods, as reconfirmed through the simulations.

Date: 2018-09
New Economics Papers: this item is included in nep-ecm and nep-ets
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