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Specification Tests For Multiplicative Error Models

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  • Perera, Indeewara
  • Silvapulle, Mervyn J.

Abstract

The family of multiplicative error models is important for studying non-negative variables such as realized volatility, trading volume, and duration between consecutive financial transactions. Methods are developed for testing the parametric specification of a multiplicative error model, which consists of separate parametric models for the conditional mean and the error distribution. The same method can also be used for testing the specification of the error distribution provided the conditional mean is correctly specified. A bootstrap method is proposed for computing the p-values of the tests and is shown to be consistent. The proposed tests have nontrivial asymptotic power against a class of O(n −1/2)-local alternatives. The tests performed well in a simulation study, and they are illustrated using a data example on realized volatility.

Suggested Citation

  • Perera, Indeewara & Silvapulle, Mervyn J., 2017. "Specification Tests For Multiplicative Error Models," Econometric Theory, Cambridge University Press, vol. 33(2), pages 413-438, April.
    • Handle: RePEc:cup:etheor:v:33:y:2017:i:02:p:413-438_00
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    Citations

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    Cited by:

    1. Giuseppe Cavaliere & Indeewara Perera & Anders Rahbek, 2021. "Specification tests for GARCH processes," Papers 2105.14081, arXiv.org.
    2. Cipollini, Fabrizio & Gallo, Giampiero M., 2025. "Multiplicative Error Models: 20 years on," Econometrics and Statistics, Elsevier, vol. 33(C), pages 209-229.
    3. Stephen Thiele, 2020. "Modeling the conditional distribution of financial returns with asymmetric tails," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 35(1), pages 46-60, January.
    4. Perera, Indeewara & Silvapulle, Mervyn J., 2021. "Bootstrap based probability forecasting in multiplicative error models," Journal of Econometrics, Elsevier, vol. 221(1), pages 1-24.
    5. Perera, Indeewara & Silvapulle, Mervyn J., 2023. "Bootstrap specification tests for dynamic conditional distribution models," Journal of Econometrics, Elsevier, vol. 235(2), pages 949-971.
    6. Cavaliere, Giuseppe & Lu, Ye & Rahbek, Anders & Stærk-Østergaard, Jacob, 2023. "Bootstrap inference for Hawkes and general point processes," Journal of Econometrics, Elsevier, vol. 235(1), pages 133-165.
    7. Perera, Indeewara & Koul, Hira L., 2017. "Fitting a two phase threshold multiplicative error model," Journal of Econometrics, Elsevier, vol. 197(2), pages 348-367.
    8. Cipollini, Fabrizio & Gallo, Giampiero M., 2025. "Multiplicative Error Models: 20 years on," Econometrics and Statistics, Elsevier, vol. 33(C), pages 209-229.
    9. Ke, Rui & Lu, Wanbo & Jia, Jing, 2021. "Evaluating multiplicative error models: A residual-based approach," Computational Statistics & Data Analysis, Elsevier, vol. 153(C).
    10. Lien, Donald & Lee, Geul & Yang, Li & Zhang, Yuyin, 2018. "Volatility spillovers among the U.S. and Asian stock markets: A comparison between the periods of Asian currency crisis and subprime credit crisis," The North American Journal of Economics and Finance, Elsevier, vol. 46(C), pages 187-201.

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