Testing Weak Exogeneity in the Exponential Family: An Application to Financial Marked-Point Processes

CORE Discussion Paper No. 2004/49

29 Pages Posted: 6 Sep 2005

See all articles by Juan Jose Dolado

Juan Jose Dolado

Charles III University of Madrid - Department of Economics; Centre for Economic Policy Research (CEPR); Institute for the Study of Labor (IZA); CESifo (Center for Economic Studies and Ifo Institute)

Juan Manuel Rodriguez-Poo

University of Cantabria - Department of Economics

David Veredas

Vlerick Business School

Date Written: July 2004

Abstract

A common practice in empirical work is to estimate the conditional mean of a variable y on another variable x, ignoring its marginal density. Weak exogeneity of x for the parameters of interest in the conditional mean ensures valid inference. Available weak exogeneity tests correspond to a Gaussian-linear environment. However, there are some variables, typically related to financial marked-point processes, where non-Gaussian distributions and nonlinear means are much more appropriate assumptions. We propose two tests for weak exogeneity when the density is not necessarily Gaussian but belongs to the the family of exponential densities, and the conditional and marginal means are nonlinear. Both tests exploit dependencies (lack of free variation), under the alternative hypotesis, among parameters in both means. To illustrate this testing procedure, we analyze the relationship between trade size and trade durations for four stocks traded at NYSE. The null hypothesis of weak exogeneity is often rejected, questioning therefore some results in the literature which rely on separate estimation of each density.

Keywords: Weak exogeneity, pseudo-maximum likelihood, semiparametric models, point processes, high-frequency data. stealth trading, mixture of distribution hypothesis

JEL Classification: C12, C41, C52, G10

Suggested Citation

Dolado, Juan Jose and Rodriguez-Poo, Juan Manuel and Veredas, David, Testing Weak Exogeneity in the Exponential Family: An Application to Financial Marked-Point Processes (July 2004). CORE Discussion Paper No. 2004/49, Available at SSRN: https://ssrn.com/abstract=795384 or http://dx.doi.org/10.2139/ssrn.795384

Juan Jose Dolado

Charles III University of Madrid - Department of Economics ( email )

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Juan Manuel Rodriguez-Poo

University of Cantabria - Department of Economics ( email )

David Veredas (Contact Author)

Vlerick Business School ( email )

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