Improving Robust Model Selection Tests for Dynamic Models

Econometrics Journal, Forthcoming

34 Pages Posted: 5 Feb 2010 Last revised: 22 Feb 2010

See all articles by Hwan-sik Choi

Hwan-sik Choi

Purdue University - Department of Consumer Sciences & Retailing

Nicholas M. Kiefer

Cornell University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: November 4, 2010

Abstract

We propose an improved model selection test for dynamic models based on the method of Rivers and Vuong (2002) using a new asymptotic approximation to the sampling distribution of a new test statistic. The model selection test is applicable to dynamic models with very general selection criteria and estimation methods. Since our test statistic does not assume the exact form of a true model, the test is essentially nonparametric once competing models are estimated. For the unkown serial correlation in data, we use a Heteroskedasticity/Autocorrelation Consistent (HAC) variance estimator, and the sampling distribution of the test statistic is approximated by the fixed-b asymptotic approximation (Kiefer and Vogelsang (2005)). The asymptotic approximation depends on kernel functions and bandwidth parameters used in HAC estimators. We compare the finite sample performance of the new test with the bootstrap methods as well as with the standard normal approximations, and show that the fixed-b asymptotics and the bootstrap methods are markedly superior to the standard normal approximation for a moderate sample size for time series data. An empirical application for foreign exchange rate forecasting models is presented, and the result shows the normal approximation to the distribution of the test statistic considered appears to overstate the data's ability to distinguish between two competing models.

Keywords: Model Selection, Heteroskedasticity, Autocorrelation, Fixed-b Asymptotics, Bootstrap

JEL Classification: C12, C14, C15, C52

Suggested Citation

Choi, Hwan-sik and Kiefer, Nicholas M., Improving Robust Model Selection Tests for Dynamic Models (November 4, 2010). Econometrics Journal, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1547963

Hwan-sik Choi (Contact Author)

Purdue University - Department of Consumer Sciences & Retailing ( email )

812 W. State St
West Lafayette, IN 47907
United States

HOME PAGE: http://sites.google.com/site/choihwansik/

Nicholas M. Kiefer

Cornell University - Department of Economics ( email )

490 Uris Hall
Ithaca, NY 14853-7601
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
60
Abstract Views
1,129
rank
385,245
PlumX Metrics