A Consistent Diagnostic Test for Regression Models Using Projections

This paper proposes a consistent test for the goodness-of-fit of parametric regression models which overcomes two important problems of the existing tests, namely, the poor empirical power and size performance of the tests due to the curse of dimensionality and the choice of subjective parameters like bandwidths, kernels or integrating measures. We overcome these problems by using a residual marked empirical process based on projections (RMPP). We study the asymptotic null distribution of the test statistic and we show that our test is able to detect local alternatives converging to the null at the parametric rate. It turns out that the asymptotic null distribution of the test statistic depends on the data generating process, so a bootstrap procedure is considered. Our bootstrap test is robust to higher order dependence, in particular to conditional heteroskedasticity. For completeness, we propose a new minimum distance estimator constructed through the same RMPP as in the testing procedure. Therefore, the new estimator inherits all the good properties of the new test. We establish the consistency and asymptotic normality of the new minimum distance estimator. Finally, we present some Monte Carlo evidence that our testing procedure can play a valuable role in econometric regression modeling. Juan Carlos Escanciano Reyero Universidad de Navarra, Departamento de Métodos Cuantitativos Campus Universitario, 31080 Pamplona [email protected] Acknowledgments The author thanks Carlos Velasco and Miguel A. Delgado for useful comments. The paper has also benefited from the comments of two referees and the Co-editor. Research funded by the Spanish Ministry of Education and Science reference number SEJ200404583/ECON and by the Universidad de Navarra reference number 16037001. A CONSISTENT DIAGNOSTIC TEST FOR REGRESSION MODELS USING PROJECTIONS J. Carlos Escanciano Universidad de Navarra June 1, 2005