Department of Economics and Business Economics

Testing Constancy of the Error Covariance Matrix in Vector Models against Parametric Alternatives using a Spectral Decomposition

Research output: Working paperResearch

Documents

  • rp14_11

    Submitted manuscript, 408 KB, PDF document

  • Yukay Yang, Universite Catholique de Louvain, Belgium
I consider multivariate (vector) time series models in which the error covariance matrix may be time-varying. I derive a test of constancy of the error covariance matrix against the alternative that the covariance matrix changes over time. I design a new family of Lagrange-multiplier tests against the alternative hypothesis that the innovations are time-varying according to several parametric specifications. I investigate the size and power properties of these tests and find that the test with smooth transition specification has satisfactory size properties. The tests are informative and may suggest to consider multivariate volatility modelling.
Original languageEnglish
Place of publicationAarhus
PublisherInstitut for Økonomi, Aarhus Universitet
Number of pages28
Publication statusPublished - 8 Apr 2014
SeriesCREATES Research Papers
Number2014-11

    Research areas

  • Covariance constancy, Error covariance structure, Lagrange multiplier test, spectral decomposition, Auxiliary regression, Model misspecification, Monte Carlo simulation

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