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Testing the correct specification of a system of spatial dependence models for stock returns

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Listed:
  • Tim Kutzker

    (University of Cologne)

  • Dominik Wied

    (University of Cologne)

Abstract

This paper provides two specification tests for the system of spatial autoregressive model of order m. We derive the theoretical limit distributions and show in a detailed Monte Carlo simulation study that the tests result in reasonable sized testing procedures with large power. In the empirical application, we analyze Euro Stoxx 50 returns in two different time spans, looking for insights how well models with different specifications of the spatial weighting matrices (local, country, industry and country-industry specific dependencies including interaction effects) fit to the data. The analyzes also demonstrate the ability of the tests to detect inaccurate Value-at-Risk forecasts.

Suggested Citation

  • Tim Kutzker & Dominik Wied, 2024. "Testing the correct specification of a system of spatial dependence models for stock returns," Empirical Economics, Springer, vol. 66(5), pages 2083-2103, May.
    • Handle: RePEc:spr:empeco:v:66:y:2024:i:5:d:10.1007_s00181-023-02518-3
    DOI: 10.1007/s00181-023-02518-3
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    More about this item

    Keywords

    Heteroscedasticity; Method of moments; Spatial dependence; Stock returns; Value-at-Risk;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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