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Studies in Nonlinear Dynamics & Econometrics

Ed. by Mizrach, Bruce

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Volume 8, Issue 4 (Dec 2004)


A New Test of the Martingale Difference Hypothesis

Chung-Ming Kuan
  • 1Academia Sinica,
/ Wei-Ming Lee
  • 2National Chung-Cheng University,
Published Online: 2004-12-01 | DOI: https://doi.org/10.2202/1558-3708.1191

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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Published Online: 2004-12-01

Citation Information: Studies in Nonlinear Dynamics & Econometrics, ISSN (Online) 1558-3708, DOI: https://doi.org/10.2202/1558-3708.1191. Export Citation

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