Abstract:
Modeling conditional distributions in time series has attracted increasing attention in economics and finance. We develop a new class of generalized Cramer-von Mises (GCM) specification tests for time series conditional distribution models using a novel approach, which embeds the empirical distribution function in a spectral framework. Our tests check a large number of lags and are therefore expected to be powerful against neglected dynamics at higher order lags, which is particularly useful for nonMarkovian processes. Despite using a large number of lags, our tests do not suffer much from loss of a large number of degrees of freedom, because our approach naturally downweights higher order lags, which is consistent with the stylized fact that economic or financial markets are more affected by recent past events than by remote past events. Unlike the existing methods in the literature, the proposed GCM tests cover both univariate and multivariate conditional distribution models in a unified framework. They exploit the information in the joint conditional distribution of underlying economic processes. Moreover, a class of easy-to-interpret diagnostic procedures are supplemented to gauge possible sources of model misspecifications. Distinct from conventional CM and Kolmogorov-Smirnov (KS) tests, which are also based on the empirical distribution function, our GCM test statistics follow a convenient asymptotic N (0; 1) distribution and enjoy the appealing "nuisance parameter free" property
that parameter estimation uncertainty has no impact on the asymptotic distribution of the test statistics. Simulation studies show that the tests provide reliable inference for sample sizes often encountered in
economics and finance.

Key words: Diagnostic procedure, Empirical distribution function, Frequency domain, Generalized Cramer-von Mises test, Kernel method, Non-Markovian process, Time series conditional distribution
model

JEL Classifications: C4, G0.