The Spurious Effect of ARCH Errors on Linearity Tests:A Theoretical Note and an Alternative Maximum Likelihood Approach

Pavlidis, Efthymios and Tsionas, Efthymios (2018) The Spurious Effect of ARCH Errors on Linearity Tests:A Theoretical Note and an Alternative Maximum Likelihood Approach. Studies in Nonlinear Dynamics and Econometrics, 22 (2). ISSN 1558-3708

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Abstract

Linearity tests against smooth transition nonlinearity are typically based on the standard least-squares (LS) covariance matrix estimator. We derive an expression for the bias of the LS estimator in the presence of ARCH errors. We show that the bias is downward, and increases dramatically with the persistence of the variance process. As a consequence, conventional tests spuriously indicate nonlinearity. Next, we examine an alternative maximum likelihood approach. Our findings suggest that this approach has substantially better size properties than tests based on least-squares and heteroskedasticity-consistent matrix estimators, and performs comparably to a bootstrap technique.

Item Type:
Journal Article
Journal or Publication Title:
Studies in Nonlinear Dynamics and Econometrics
Additional Information:
Copyright © 2017 by Walter de Gruyter GmbH
Subjects:
ID Code:
86664
Deposited By:
Deposited On:
12 Jun 2017 10:08
Refereed?:
Yes
Published?:
Published
Last Modified:
25 Oct 2020 04:54