Autocontours: Dynamic Specification Testing

Posted: 23 Nov 2011

See all articles by Gloria González-Rivera

Gloria González-Rivera

University of California, Riverside (UCR) - Department of Economics

Zeynep Senyuz

Board of Governors of the Federal Reserve System

Emre Yoldas

Board of Governors of the Federal Reserve System

Date Written: October 22, 2009

Abstract

We propose a new battery of dynamic specification tests for the joint hypothesis of iid-ness and density function based on the fundamental properties of independent random variables with identical distributions. We introduce a device — the autocontour — whose shape is very sensitive to departures from the null in either direction, thus providing superior power. The tests are parametric with asymptotic t and chi-squared limiting distributions and standard convergence rates. They do not require a transformation of the original data or a Kolmogorov style assessment of goodness-of-fit, explicitly account for parameter uncertainty, and have superior finite sample properties. An application to autoregressive conditional duration (ACD) models for trade durations shows that the difficulty with the assumed densities lies on the probability assigned to very small durations. Supplemental materials for this article are available online.

Keywords: Autoregressive conditional duration model, Bootstrap, Parameter uncertainty, Probability contour plot

Suggested Citation

González-Rivera, Gloria and Senyuz, Zeynep and Yoldas, Emre, Autocontours: Dynamic Specification Testing (October 22, 2009). Journal of Business and Economic Statistics, Vol. 29, No. 1, pp. 186-200, January 2011, Available at SSRN: https://ssrn.com/abstract=1963217

Gloria González-Rivera

University of California, Riverside (UCR) - Department of Economics ( email )

900 University Avenue
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Zeynep Senyuz

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Emre Yoldas (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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