A non-parametric statistic for testing conditional heteroscedasticity for unobserved component models

Peer Reviewed
25 February 2020

Alejandro Rodriguez, Gabriel Pino, Rodrigo Herrera

When prediction intervals are constructed using unobserved component models (UCM), problems can arise due to the possible existence of components that may or may not be conditionally heteroscedastic. Accurate coverage depends on correctly identifying the source of the heteroscedasticity. Different proposals for testing heteroscedasticity have been applied to UCM; however, in most cases, these procedures are unable to identify the heteroscedastic component correctly. The main issue is that test statistics are affected by the presence of serial correlation, causing the distribution of the statistic under conditional homoscedasticity to remain unknown. We propose a nonparametric statistic for testing heteroscedasticity based on the well-known Wilcoxon's rank statistic. We study the asymptotic validation of the statistic and examine bootstrap procedures for approximating its finite sample distribution. Simulation results show an improvement in the size of the homoscedasticity tests and a power that is clearly comparable with the best alternative in the literature. We also apply the test on real inflation data. Looking for the presence of a conditionally heteroscedastic effect on the error terms, we arrive at conclusions that almost all cases are different than those given by the alternative test statistics presented in the literature.

Files and links

Publication reference
Rodriguez, A., Pino, G., & Herrera, R. (2020). A non-parametric statistic for testing conditional heteroscedasticity for unobserved component models. Journal of Applied Statistics, 1–27. doi:10.1080/02664763.2020.1732885

Request a publication

Due to Copyright we cannot publish this article but you are very welcome to request a copy from the author. Please just fill in the information beneath.

Authors I want to contact
Publication | 30 July 2020