Abstract

In this paper we propose a new class of tests for the martingale difference hypothesis based on the moment conditions derived by Bierens (1982). In contrast with the existing consistent tests, the proposed test has a standard limiting distribution and is easy to implement. Comparing with many commonly used autocorrelation- and spectrum-based tests, it has better power against a larger class of alternatives that may be serially correlated or uncorrelated. Moreover, this test does not rely on the assumption of conditional homoskedasticity and requires a weaker moment condition. Our simulations confirm that the proposed test is powerful against various linear and nonlinear alternatives and is quite robust to the failure of higher-order moments. Our empirical study on exchange rate returns also shows that the conclusion resulted from the proposed test is different from that of the conventional tests.

Recommended Citation

Chung-Ming Kuan and Wei-Ming Lee (2004) "A New Test of the Martingale Difference Hypothesis", Studies in Nonlinear Dynamics & Econometrics: Vol. 8: No. 4, Article 1.
http://www.bepress.com/snde/vol8/iss4/art1

Related Files

kuan_datacode.zip (13 kB)
Data and programs