Department of Economics and Business Economics

Time-varying parameters: New test tailored to applications in finance and macroeconomics

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Many economic theories imply a linear relationship with constant parameters between financial or macroeconomic variables. While the linear model with constant parameters is often disputed in the literature, this model specification is rarely tested. This paper proposes a new and intuitively appealing test for model specification tailored for applications in finance and macroeconomics. Importantly, the test allows for autocorrelation, which is often present in these applications. We demonstrate impressive properties of the test in a realistic simulation study and obtain important insights from empirical applications.
Original languageEnglish
Place of publicationAarhus
PublisherInstitut for Økonomi, Aarhus Universitet
Number of pages28
Publication statusPublished - 20 Aug 2018
SeriesCREATES Research Papers
Number2018-22

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