A low-dimension portmanteau test for non-linearity

By Jennifer L. Castle, David F. Hendry. 2010

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A new test for non-linearity in the conditional mean is proposed using functions of the principal components of regressors. The test extends the non-linearity tests based on Kolmogorov-Gavor polynomials (Thursby and Schmidt, 1977, Tsay, 1986, and Terasvirta, Lin and Granger, 1993), but circumvents problems of high dimensionality, is equivariant to collinearity, and includes exponential functions, so is a portmanteau test with power against a wide range of possible alternatives. A Monte Carlo analysis compared the performance of the test to the optimal infeasible test and to alternative tests. The relative performance of the test is encouraging: the test has the appropriate size and has high power in many situations.

Subfields: Finance, Statistics and Probability

View Paper: https://www.semanticscholar.org/paper/c6ed2cf50a63419458eae896f27815328cf8b1ba