A joint Chow test for structural instability
The classical Chow test for structural instability requires strictly exogenous regressors and a break-point specified in advance. In this paper we consider two generalisations, the 1-step recursive Chow test (based on the sequence of studentized recursive residuals) and its supremum counterpart, whi...
| Main Authors: | , |
|---|---|
| Format: | Journal article |
| Language: | English |
| Published: |
2015
|
| Summary: | The classical Chow test for structural instability requires strictly exogenous regressors and a break-point specified in advance. In this paper we consider two generalisations, the 1-step recursive Chow test (based on the sequence of studentized recursive residuals) and its supremum counterpart, which relax these requirements. We use results on strong consistency of regression estimators to show that the 1-step test is appropriate for stationary, unit root or explosive processes modelled in the autoregressive distributed lags (ADL) framework. We then use results in extreme value theory to develop a new supremum version of the test, suitable for formal testing of structural instability with an unknown break-point. The test assumes normality of errors, and is intended to be used in situations where this can be either assumed or established empirically. Simulations show that the supremum test has desirable power properties, in particular against level shifts late in the sample and against outliers. An application to UK GDP data is given. |
|---|