AcademicsJournal

Testing for the Markov Property in Time Series
Bin Chen, Yongmiao Hong
Econometric Theory
#002143 20131014 (published)
The Markov property is a fundamental property in time series analysis and is often assumed in economic and …nancial modelling. We develop a new test for the Markov property using the conditional characteristic function embedded in a frequency domain approach, which checks the implication of the Markov property in every conditional moment (if exists) and over many lags. The proposed test is applicable to both univariate and multivariate time series with discrete or continuous distributions. Simulation studies show that with the use of a smoothed nonparametric transition density-based bootstrap procedure, the proposed test has reasonable sizes and all-around power against several popular non-Markov alternatives in …nite samples. We apply the test to a number of …nancial time series and …nd some evidence against the Markov property.
JEL-Codes: C1, C4, G0
Keywords: Conditional characteristic function, Generalized cross-spectrum, Markov property, Smoothed nonparametric bootstrap


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