GMM based tests for locally misspecified models
Date
2006-09
Authors
Sosa Escudero, Walter
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Journal Title
Journal ISSN
Volume Title
Publisher
Universidad de San Andrés. Departamento de Economía
Abstract
This paper shows that the standard Newey-West GMM based test is sensitive to the
presence of locally misspecified alternatives. In particular, such test is shown to have
incorrect size when the null model is locally contaminated, making the test spuriously
reject the null hypothesis even when it is correct. After obtaining the distribution of
the Newey-West test statistic under the misspecified alternative, the paper derives a
Bera-Yoon modified test based on a restricted GMM estimator, which has the correct
size under local misspecification. The paper can be seen as extending the likelihood
based results of Saikkonen (1989), Davidson and MacKinnon (1987) and Bera and
Yoon (1993) to the GMM framework, which does not require full specification of the
underlying probabilistic model.
Description
Fil: Sosa Escudero, Walter. Universidad de San Andrés. Departamento de Economía; Argentina.