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Time-varying parameters: New test tailored to applications in finance and macroeconomics

Author

Listed:
  • Russell Davidson

    (Department of Economics and CIREQ, McGill University)

  • Niels S. Grønborg

    (Aarhus University and CREATES)

Abstract
Many economic theories imply a linear relationship with constant parameters between financial or macroeconomic variables. While the linear model with constant parameters is often disputed in the literature, this model specification is rarely tested. This paper proposes a new and intuitively appealing test for model specification tailored for applications in finance and macroeconomics. Importantly, the test allows for autocorrelation, which is often present in these applications. We demonstrate impressive properties of the test in a realistic simulation study and obtain important insights from empirical applications.

Suggested Citation

  • Russell Davidson & Niels S. Grønborg, 2018. "Time-varying parameters: New test tailored to applications in finance and macroeconomics," CREATES Research Papers 2018-22, Department of Economics and Business Economics, Aarhus University.
    • Handle: RePEc:aah:create:2018-22
    as

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    File URL: https://repec.econ.au.dk/repec/creates/rp/18/rp18_22.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Nonparametric estimator; Time-varying parameters; Bootstrap; Finance; Macroeconomics;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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