A low-dimension portmanteau test for non-linearity

Working paper

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.

Authors: Castle, J; Hendry, D

• Publication status: Published
• Publisher: University of Oxford
• Series: Department of Economics Discussion Paper Series
• Publication date: 2010-01-01
• Paper number: 471
• Keywords: principal components; non-linearity; Portmanteau test; collinearity; functional form