Testing weak exogeneity in multiplicative error models

Kul Luintel () and Yongdeng Xu

No E2013/6, Cardiff Economics Working Papers from Cardiff University, Cardiff Business School, Economics Section

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- -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.

Keywords: Weak exogeneity; Multiplicative error model; LM test; Market microstructure (search for similar items in EconPapers)
JEL-codes: C12 C32 G10 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2013-04
New Economics Papers: this item is included in nep-ecm and nep-ets
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Journal Article: Testing weak exogeneity in multiplicative error models (2017)
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