On the Choice of Instruments in Mixed Frequency Specification Tests

Time averaging has been the traditional approach to handle mixed sampling frequencies. However, it ignores information possibly embedded in high frequency. Mixed data sampling (MIDAS) regression models provide a concise way to utilize the additional information in high-frequency variables. In this paper, we propose a specification test to choose between time averaging and MIDAS models, based on a Durbin-Wu-Hausman test. In particular, a set of instrumental variables is proposed and theoretically validated when the frequency ratio is large. As a result, our method tends to be more powerful than existing methods, as reconfirmed through the simulations