The wild bootstrap and heteroskedasticity-robust tests for serial correlation in dynamic regression models

Conditional heteroskedasticity is a common feature of financial and macroeconomic time series data. When such heteroskedasticity is present, standard checks for serial correlation in dynamic regression models are inappropriate. In such circumstances, it is obviously important to have asymptotically valid tests that are reliable in finite samples. Monte Carlo evidence reported in this paper indicates that asymptotic critical values fail to give good control of finite sample significance levels of heteroskedasticity-robust versions of the standard Lagrange multiplier test, a Hausman-type check, and a new procedure. The application of computer-intensive methods to removing size distortion is, therefore, examined. It is found that a particularly simple form of the wild bootstrap leads to well-behaved tests. Some simulation evidence on power is also given.