A New Test of the Martingale Difference Hypothesis : Studies in Nonlinear Dynamics & Econometrics

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Studies in Nonlinear Dynamics & Econometrics

Ed. by Mizrach, Bruce

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A New Test of the Martingale Difference Hypothesis

Chung-Ming Kuan1 / Wei-Ming Lee2

1Academia Sinica,

2National Chung-Cheng University,

Citation Information: Studies in Nonlinear Dynamics & Econometrics. Volume 8, Issue 4, ISSN (Online) 1558-3708, DOI: 10.2202/1558-3708.1191, December 2004

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This article offers supplementary material which is provided at the end of the article.

In this paper we propose a new class of tests for the martingale difference hypothesis based on the moment conditions derived by Bierens (1982). In contrast with the existing consistent tests, the proposed test has a standard limiting distribution and is easy to implement. Comparing with many commonly used autocorrelation- and spectrum-based tests, it has better power against a larger class of alternatives that may be serially correlated or uncorrelated. Moreover, this test does not rely on the assumption of conditional homoskedasticity and requires a weaker moment condition. Our simulations confirm that the proposed test is powerful against various linear and nonlinear alternatives and is quite robust to the failure of higher-order moments. Our empirical study on exchange rate returns also shows that the conclusion resulted from the proposed test is different from that of the conventional tests.

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