Time-Varying Parameters: New Test Tailored to Applications in Finance and Macroeconomics

Russell Davidson, Niels Groenborg
2018 Social Science Research Network  
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
more » ... mpressive properties of the test in a realistic simulation study and obtain important insights from empirical applications. JEL classification: C12, C14, C32, E61, G12.
doi:10.2139/ssrn.3230713 fatcat:2n5vd3dt3fbs3fkvmlsrffwv5m