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Detecting Misspecifications in Autoregressive Conditional Duration Models


Yongmiao Hong


Cornell University - Department of Economics

Yoon-Jin Lee


Indiana University Bloomington - Department of Economics

September 26, 2007

CAEPR Working Paper No. 2007-019

Abstract:     
We propose a new class of specification tests for Autoregressive Conditional Duration (ACD) models. Both linear and nonlinear ACD models are covered, and standardized innovations can have time-varying conditional dispersion and higher order conditional moments of unknown form. No specific estimation method is required, and the tests have a convenient null asymptotic N(0,1) distribution. To reduce the impact of parameter estimation uncertainty in finite samples, we adopt Wooldridge's (1990a) device to our context and justify its validity. Simulation studies show that the finite sample correction gives better sizes in finite samples and are robust to parameter estimation uncertainty. And, it is important to take into account time-varying conditional dispersion and higher order conditional moments in standardized innovations; failure to do so can cause strong overrejection of a correctly specified ACD model. The proposed tests have reasonable power against a variety of popular linear and nonlinear ACD alternatives.

Number of Pages in PDF File: 33

Keywords: Autoregressive Conditional Duration, Dispersion Clustering, Finite Sample Correction, Generalized Spectral Derivative, Nonlinear Time Series, Parameter Estimation Uncertainty, Wooldridge's Device

JEL Classification: C4, C2

working papers series





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Date posted: September 28, 2007  

Suggested Citation

Hong, Yongmiao and Lee, Yoon-Jin, Detecting Misspecifications in Autoregressive Conditional Duration Models (September 26, 2007). CAEPR Working Paper No. 2007-019. Available at SSRN: http://ssrn.com/abstract=1017344 or http://dx.doi.org/10.2139/ssrn.1017344

Contact Information

Yongmiao Hong (Contact Author)
Cornell University - Department of Economics ( email )
Department of Statistical Science
414 Uris Hall
Ithaca, NY 14853-7601
United States
607-255-5130 (Phone)
607-255-2818 (Fax)
Yoon-Jin Lee
Indiana University Bloomington - Department of Economics ( email )
Wylie Hall
Bloomington, IN 47405-6620
United States

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