Specification Testing for Transformation Models with an Application to Generalized Accelerated Failure-time Models

Arthur Lewbel, Xun Lu and Liangjun Su ()
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Xun Lu: Hong Kong University of Science and Technology

No 817, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: Consider a nonseparable model Y=R(X,U) where Y and X are observed, while U is unobserved and conditionally independent of X. This paper provides the first nonparametric test of whether R takes the form of a transformation model, meaning that Y is monotonic in the sum of a function of X plus a function of U. Transformation models of this form are commonly assumed in economics, including, e.g., standard specifications of duration models and hedonic pricing models. Our test statistic is asymptotically normal under local alternatives and consistent against nonparametric alternatives. Monte Carlo experiments show that our test performs well in finite samples. We apply our results to test for specifications of generalized accelerated failure-time (GAFT) models of the duration of strikes and of marriages.

Keywords: additivity; control variable; endogenous variable; monotonicity; nonparametric nonseparable model; hazard model; specification test; transformation model; unobserved heterogeneity (search for similar items in EconPapers)
JEL-codes: C12 C14 (search for similar items in EconPapers)
Date: 2012-12-24, Revised 2013-05-01
New Economics Papers: this item is included in nep-ecm
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Journal Article: Specification testing for transformation models with an application to generalized accelerated failure-time models (2015)
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