Exact Tests for Contemporaneous Correlation of Disturbances in Seemingly Unrelated Regressions

Jean-Marie Dufour () and Lynda Khalaf

Cahiers de recherche from Universite de Montreal, Departement de sciences economiques

Abstract: This paper proposes finite-sample procedures for testing the SURE specification in multi-equation regression models, i.e. whether the disturbances in different equations are contemporaneously uncorrelated or not. We apply the technique of Monte Carlo (MC) tests [Dwass (1957), Barnard (1963)] to obtain exact tests based on standard LR and LM zero correlation tests. We also suggest a MC quasi-LR (QLR) test based on feasible generalized least squares (FGLS). We show that the latter statistics are pivotal under the null, which provides the justification for applying MC tests. Furthermore, we extend the exact independence test proposed by Harvey and Phillips (1982) to the multi-equation framework. Specifically, we introduce several induced tests based on a set of simultaneous Harvey/Phillips-type tests and suggest a simulation-based solution to the associated combination problem. The properties of the proposed tests are studied in a Monte Carlo experiment which shows that standard asymptotic tests exhibit important size distortions, while MC tests achieve complete size control and display good power. Moreover, MC-QLR tests performed best in terms of power, a result of interest from the point of view of simulation-based tests. The power of the MC induced tests improves appreciably in comparison to standard Bonferroni tests and, in certain cases, outperforms the likelihood-based MC tests. The tests are applied to data used by Fischer (1993) to analyze the macroeconomic determinants of growth.

Keywords: seemingly unrelated regressions; SURE system; multivariate linear regression; contemraneous correlation; exact test; finite-same test; Monte Carlo test; bootstra induced test; LM test; likelihood ratio test; scification test; macroeconomics; growth (search for similar items in EconPapers)
JEL-codes: C15 C20 C42 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2000
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Downloads: (external link)
http://hdl.handle.net/1866/335 (application/pdf)

Related works:
Journal Article: Exact tests for contemporaneous correlation of disturbances in seemingly unrelated regressions (2002)
Working Paper: Exact Tests for Contemporaneous Correlation of Disturbances in Seemingly Unrelated Regressions (2000)
Working Paper: Exact Tests for Contemporaneous Correlation of Disturbances in Seemingly Unrelated Regressions (2000)
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Persistent link: https://EconPapers.repec.org/RePEc:mtl:montde:2000-11

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