On the Choice of Instruments in Mixed Frequency Specification Tests

Yun Liu; Yeonwoo Rho

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arXiv · 1809.05503

On the Choice of Instruments in Mixed Frequency Specification Tests

Yun Liu·Yeonwoo Rho

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Abstract

Time averaging has been the traditional approach to handle mixed sampling frequencies. However, it ignores information possibly embedded in high frequency. Mixed data sampling (MIDAS) regression models provide a concise way to utilize the additional information in high-frequency variables. In this paper, we propose a specification test to choose between time averaging and MIDAS models, based on a Durbin-Wu-Hausman test. In particular, a set of instrumental variables is proposed and theoretically validated when the frequency ratio is large. As a result, our method tends to be more powerful than existing methods, as reconfirmed through the simulations.

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Yun Liu, Yeonwoo Rho. 2018-09-14. On the Choice of Instruments in Mixed Frequency Specification Tests. https://arxiv.org/abs/1809.05503

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