Testing constancy of the error covariance matrix in vector models |
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Authors: | Bruno Eklund Timo Tersvirta |
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Institution: | aEconomics Department, Central Bank of Iceland, Kalkofnsvegur 1, IS-150 Reykjavik, Iceland;bDepartment of Economic Statistics and Decision Support, Stockholm School of Economics, P.O. Box 6501, SE-113 83 Stockholm, Sweden |
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Abstract: | In this paper a Lagrange multiplier test of the hypothesis that the covariance matrix of a multivariate time series model is constant over time is considered. It is assumed that under the alternative, the error variances are time-varying, whereas the correlations remain constant over time. Under the parameterized alternative hypothesis the variances may change continuously as a function of time or some observable stochastic variables. Small-sample properties of the test statistic are investigated by simulation. The assumption of constant correlations does not appear overly restrictive. |
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Keywords: | Covariance constancy Error covariance structure Lagrange multiplier test Model misspecification Monte Carlo simulation |
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