Structural Break Tests Robust to Regression Misspecification
Structural break tests for regression models are sensitive to model misspecification. We show—analytically and through simulations—that the sup Wald test for breaks in the conditional mean and variance of a time series process exhibits severe size distortions when the conditional...
| Main Authors: | , , |
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| Format: | Article |
| Language: | English |
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MDPI AG
2018-05-01
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| Series: | Econometrics |
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| Online Access: | http://www.mdpi.com/2225-1146/6/2/27 |
| _version_ | 1798002487436771328 |
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| author | Alaa Abi Morshed Elena Andreou Otilia Boldea |
| author_facet | Alaa Abi Morshed Elena Andreou Otilia Boldea |
| author_sort | Alaa Abi Morshed |
| collection | DOAJ |
| description | Structural break tests for regression models are sensitive to model misspecification. We show—analytically and through simulations—that the sup Wald test for breaks in the conditional mean and variance of a time series process exhibits severe size distortions when the conditional mean dynamics are misspecified. We also show that the sup Wald test for breaks in the unconditional mean and variance does not have the same size distortions, yet benefits from similar power to its conditional counterpart in correctly specified models. Hence, we propose using it as an alternative and complementary test for breaks. We apply the unconditional and conditional mean and variance tests to three US series: unemployment, industrial production growth and interest rates. Both the unconditional and the conditional mean tests detect a break in the mean of interest rates. However, for the other two series, the unconditional mean test does not detect a break, while the conditional mean tests based on dynamic regression models occasionally detect a break, with the implied break-point estimator varying across different dynamic specifications. For all series, the unconditional variance does not detect a break while most tests for the conditional variance do detect a break which also varies across specifications. |
| first_indexed | 2024-04-11T11:52:58Z |
| format | Article |
| id | doaj.art-51911c965fae499f8d2d61000c7fe360 |
| institution | Directory Open Access Journal |
| issn | 2225-1146 |
| language | English |
| last_indexed | 2024-04-11T11:52:58Z |
| publishDate | 2018-05-01 |
| publisher | MDPI AG |
| record_format | Article |
| series | Econometrics |
| spelling | doaj.art-51911c965fae499f8d2d61000c7fe3602022-12-22T04:25:15ZengMDPI AGEconometrics2225-11462018-05-01622710.3390/econometrics6020027econometrics6020027Structural Break Tests Robust to Regression MisspecificationAlaa Abi Morshed0Elena Andreou1Otilia Boldea2Department of Finance and Business Intelligence, AEGON Nederland, 2591 TV Den Haag, The NetherlandsDepartment of Economics and CEPR, University of Cyprus, P.O. Box 20537, 1678 Nicosia, CyprusDepartment of Econometrics and Operation Research and CentER, Tilburg University, P.O. Box 90153, 5000 LE Tilburg, The NetherlandsStructural break tests for regression models are sensitive to model misspecification. We show—analytically and through simulations—that the sup Wald test for breaks in the conditional mean and variance of a time series process exhibits severe size distortions when the conditional mean dynamics are misspecified. We also show that the sup Wald test for breaks in the unconditional mean and variance does not have the same size distortions, yet benefits from similar power to its conditional counterpart in correctly specified models. Hence, we propose using it as an alternative and complementary test for breaks. We apply the unconditional and conditional mean and variance tests to three US series: unemployment, industrial production growth and interest rates. Both the unconditional and the conditional mean tests detect a break in the mean of interest rates. However, for the other two series, the unconditional mean test does not detect a break, while the conditional mean tests based on dynamic regression models occasionally detect a break, with the implied break-point estimator varying across different dynamic specifications. For all series, the unconditional variance does not detect a break while most tests for the conditional variance do detect a break which also varies across specifications.http://www.mdpi.com/2225-1146/6/2/27structural changesup Wald testdynamic misspecification |
| spellingShingle | Alaa Abi Morshed Elena Andreou Otilia Boldea Structural Break Tests Robust to Regression Misspecification Econometrics structural change sup Wald test dynamic misspecification |
| title | Structural Break Tests Robust to Regression Misspecification |
| title_full | Structural Break Tests Robust to Regression Misspecification |
| title_fullStr | Structural Break Tests Robust to Regression Misspecification |
| title_full_unstemmed | Structural Break Tests Robust to Regression Misspecification |
| title_short | Structural Break Tests Robust to Regression Misspecification |
| title_sort | structural break tests robust to regression misspecification |
| topic | structural change sup Wald test dynamic misspecification |
| url | http://www.mdpi.com/2225-1146/6/2/27 |
| work_keys_str_mv | AT alaaabimorshed structuralbreaktestsrobusttoregressionmisspecification AT elenaandreou structuralbreaktestsrobusttoregressionmisspecification AT otiliaboldea structuralbreaktestsrobusttoregressionmisspecification |