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A Unified Approach to Validating Univariate and Multivariate Conditional Distribution Models in Time Series
Bin Chen, Yongmiao Hong
Journal of Econometrics 178 (2014) 22–44
#002309 20160221 ()
Modeling conditional distributions in time series has attracted increasing attention in economics and finance.Wedevelop a new class of generalized Cramer–von Mises (GCM) specification tests for time series conditional distribution models using a novel approach, which embeds the empirical distribution function in a spectral framework. Our tests check a large number of lags and are therefore expected to be powerful against neglected dynamics at higher order lags, which is particularly useful for non-Markovian processes. Despite using a large number of lags, our tests do not suffer much from loss of a large number of degrees of freedom, because our approach naturally downweights higher order lags, which is consistent with the stylized fact that economic or financial markets are more affected by recent past events than by remote past events. Unlike the existing methods in the literature, the proposed GCM tests cover both univariate and multivariate conditional distribution models in a unified framework. They exploit the information in the joint conditional distribution of underlying economic processes. Moreover, a class of easy-tointerpret diagnostic procedures are supplemented to gauge possible sources of model misspecifications. Distinct from conventionalCMand Kolmogorov–Smirnov (KS) tests, which are also based on the empirical distribution function, our GCM test statistics follow a convenient asymptotic N(0, 1) distribution and enjoy the appealing ‘‘nuisance parameter free’’ property that parameter estimation uncertainty has no impact on the asymptotic distribution of the test statistics. Simulation studies show that the tests provide reliable inference for sample sizes often encountered in economics and finance.
JEL-Codes: C4 G0
Keywords: Diagnostic procedure Empirical distribution function Frequency domain Generalized Cramer–von Mises test Kernel method Non-Markovian process Time series conditional distribution model


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