Finite-Sample Properties of Model Specification Tests for Multivariate Dynamic Regression Models

Abstract: This paper proposes a new multivariate model specification test that generalizes Durbin regression to a seemingly unrelated regression framework and reframes the Durbin approach as a GLS-class estimator. The proposed estimator explicitly models cross-equation dependence and the joint second-order dynamics of regressors and disturbances. It remains consistent under a comparatively weak dependence condition in which conventional OLS- and GLS-based estimators can be inconsistent, and it is asymptotically efficient under stronger conditions. Monte Carlo experiments indicate that the associated Wald test achieves improved size control and competitive power in finite samples, especially when combined with a bootstrap-based bias correction. An empirical application further illustrates that the proposed procedure delivers stable inference and is practically useful for multi-equation specification testing.