Publication Type

Working Paper

Version

publishedVersion

Publication Date

1-2016

Abstract

Based on the Girsanov theorem, this paper first obtains the exact distribution of the maximum likelihood estimator of structural break point in a continuous time model. The exact distribution is asymmetric and tri-modal, indicating that the estimator is seriously biased. These two properties are also found in the finite sample distribution of the least squares estimator of structural break point in the discrete time model. The paper then builds a continuous time approximation to the discrete time model and develops an in-fill asymptotic theory for the least squares estimator. The obtained in-fill asymptotic distribution is asymmetric and tri-modal and delivers good approximations to the finite sample distribution. In order to reduce the bias in the estimation of both the continuous time model and the discrete time model, a simulation-based method based on the indirect estimation approach is proposed. Monte Carlo studies show that the indirect estimation method achieves substantial bias reductions. However, since the binding function has a slope less than one, the variance of the indirect estimator is larger than that of the original estimator.

Keywords

Structural break, Bias reduction, Indirect estimation, Exact distribution, In-fill asymptotics

Discipline

Econometrics

Research Areas

Econometrics

Volume

01-2016

First Page

1

Last Page

47

Publisher

SMU Economics and Statistics Working Paper Series, No. 01-2016

City or Country

Singapore

Embargo Period

2-22-2016

Copyright Owner and License

Authors

Comments

Published in Journal of Econometrics, 2018, 205 (1), 156-176. https://doi.org/10.1016/j.jeconom.2018.03.009

Download

Included in

Econometrics Commons

Share

COinS