Residual-based diagnostic tests for noninvertible ARMA models

Abstract

This paper proposes two residual-based diagnostic tests for noninvertible ARMA models. The tests are analogous to the portmanteau tests developed by Box and Pierce (1970), Ljung and Box (1978) and McLeod and Li (1983) in the conventional invertible case. We derive the asymptotic chi-squared distributions for the tests and study the size and power properties in a Monte Carlo simulation study.

An empirical application employing financial time series data points out the usefulness of noninvertible ARMA model in analyzing stock returns and the use of the proposed test statistics.