Specification testing for transformation models with an application to generalized accelerated failure-time models

• Main Authors: LEWBEL, Arthur, LU, Xun, SU, Liangjun
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2015
• Subjects: Additivity; Control variable; Endogenous variable; Monotonicity; Nonparametric nonseparable model; Hazard model; Specification test; Transformation model; Unobserved heterogeneity; Econometrics; Economics
• Online Access: https://ink.library.smu.edu.sg/soe_research/1636; https://ink.library.smu.edu.sg/context/soe_research/article/2635/viewcontent/SpecTestTansformationModelsGAFT_20130501.pdf
• Institution: Singapore Management University

This paper provides a nonparametric test of the specification of a transformation model. Specifically, we test whether an observable outcome Y is monotonic in the sum of a function of observable covariates X plus an unobservable error U. Transformation models of this form are commonly assumed in economics, including, e.g., standard specifications of duration models and hedonic pricing models. Our test statistic is asymptotically normal under local alternatives and consistent against nonparametric alternatives violating the implied restriction. Monte Carlo experiments show that our test performs well in finite samples. We apply our results to test for specifications of generalized accelerated failure-time (GAFT) models of the duration of strikes.