Title

Testing Structural Change in Time-Series Nonparametric Regression Models

Publication Type

Journal Article

Publication Date

3-2009

Abstract

Checking parameter stability of econometric models is a long-standing problem. Almost all existing structural change tests in econometrics are designed to detect abrupt breaks. Little attention has been paid to smooth structural changes, which may be more realistic in economics. We propose a consistent test for smooth structural changes as well as abrupt structural breaks with known or unknown change points. The idea is to estimate smooth time-varying parameters by local smoothing and compare the fitted values of the restricted constant parameter model and the unrestricted time-varying parameter model. The test is asymptotically pivotal and does not require prior information about the alternative. A simulation study highlights the merits of the proposed test relative to a variety of popular tests for structural changes. In an application, we strongly reject the stability of univariate and multivariate stock return prediction models in the postwar and post-oil-shocks periods.

Keywords

Kernel, model stability, nonparametric regression, parameter constancy, smooth structural change

Discipline

Economics

Research Areas

Econometrics

Publication

Statistics and Its Interface

Volume

1

Issue

2

First Page

347

Last Page

366

ISSN

1938-7989

Publisher

International Press

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

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