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Comparative Performance of U.S. Econometric Models$
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Lawrence R. Klein

Print publication date: 1991

Print ISBN-13: 9780195057720

Published to Oxford Scholarship Online: October 2011

DOI: 10.1093/acprof:oso/9780195057720.001.0001

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Stochastic-Simulation Tests of Nonlinear Econometric Models

Stochastic-Simulation Tests of Nonlinear Econometric Models

(p.250) Chapter 9 Stochastic-Simulation Tests of Nonlinear Econometric Models
Comparative Performance of U.S. Econometric Models

Roberto S. Mariano

Bryan W. Brown

Oxford University Press

Stochastic simulations of nonlinear dynamic econometric models have been used in various ways in the past. This chapter discusses how stochastic simulations can be exploited to develop appropriate system-specification tests for nonlinear systems. The approach is through auxiliary regressions of stochastic simulation errors to develop asymptotically valid significance tests of the predictive performance of the model. The first section discusses Adrian Pagan's critique of the use of simulations in testing nonlinear models for misspecification. The related issue of the informational content of multi-period-ahead predictions is also analyzed in this section. The stochastic simulations that it uses to form the prediction-based tests and their basic asymptotic properties are reviewed in the second section. The last section then develops the auxiliary regressions leading to our prediction-based tests.

Keywords:   stochastic simulations, econometric models, specification tests, nonlinear systems, Adrian Pagan, auxiliary regressions, prediction-based tests

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