Cardiff University | Prifysgol Caerdydd ORCA
Online Research @ Cardiff 
WelshClear Cookie - decide language by browser settings

Testing weak exogeneity in multiplicative error models

Luintel, Kul and Xu, Yongdeng 2017. Testing weak exogeneity in multiplicative error models. Quantitative Finance 17 (10) , pp. 1617-1630. 10.1080/14697688.2016.1274045

[img]
Preview
PDF - Accepted Post-Print Version
Download (1MB) | Preview

Abstract

Empirical market microstructure literature widely employs the non-linear and non-Gaussian Multiplicative Error Class of Models (MEMs) in modelling the dynamics of trading duration and financial marks. It routinely maintains the weak exogeneity of duration vis-à-vis marks in estimations. However, microstructure theory states that trade duration, volume and transaction prices are simultaneously determined. We propose Lagrange-multiplier (LM) tests for weak exogeneity for the MEMs. Our LM tests are extensions of the weak exogeneity tests applicable to VAR or VECM models with Gaussian distribution. Empirical assessments show that (i) weak exogeneity is widely rejected by the data in the MEMs and (ii) the failure of weak exogeneity seriously biases parameter estimates. We hope our tests will be of interest in future empirical applications.

Item Type: Article
Date Type: Publication
Status: Published
Schools: Business (Including Economics)
Subjects: H Social Sciences > HA Statistics
H Social Sciences > HG Finance
Uncontrolled Keywords: Weak exogeneity, Multiplicative error model, LM test, Market microstructure
Publisher: Taylor & Francis
ISSN: 1469-7688
Date of First Compliant Deposit: 7 April 2017
Date of Acceptance: 9 December 2016
Last Modified: 08 Sep 2018 06:24
URI: http://orca.cf.ac.uk/id/eprint/98656

Actions (repository staff only)

Edit Item Edit Item

Downloads

Downloads per month over past year

View more statistics