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Bias correction for the regression-based LM fractional integration test

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Abstract

This paper examines the finite-sample behavior of the Lagrange Multiplier (LM) test for fractional integration proposed by Breitung and Hassler (J. Econom. 110:167–185, 2002). We find by extensive Monte Carlo simulations that size distortions can be quite large in small samples. These are caused by a finite-sample bias towards the alternative. Analytic expressions for this bias are derived, based on which the test can easily be corrected.

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Authors and Affiliations

  1. Statistics and Econometric Methods, Goethe-University Frankfurt, Gräfstr. 78, 60054, Frankfurt, Germany

    Matei Demetrescu & Adina I. Tarcolea

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  1. Matei Demetrescu
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  2. Adina I. Tarcolea
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Correspondence to Adina I. Tarcolea.

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Demetrescu, M., Tarcolea, A.I. Bias correction for the regression-based LM fractional integration test. AStA 92, 91–99 (2008). https://doi.org/10.1007/s10182-008-0058-1

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  • DOI: https://doi.org/10.1007/s10182-008-0058-1

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