A MONTE-CARLO STUDY OF TESTS FOR NONNESTED MODELS ESTIMATED BY GENERALIZED-METHOD OF MOMENTS

Finite sample properties of two robust tests based on the Coy and encompassing principles are investigated using Monte Carlo simulations. The tests are constructed from generalized method of moments estimators and are robust to heteroskedastic and serially correlated errors of unknown form. Non-nested linear regression models that are estimated by the method of instrumental variables are used in the simulation. Size and power of the tests are found with control parameters which include the degree oi serial correlation and heteroskedasticity, the degree of correlation between regressors across models, the degree of correlation between regressors and instrumental variables within models, the error distribution, the sample size and the number of regressors.