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Computationally attractive stability tests for the efficient method of moments

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  • PIETER J. VAN DER SLUIS

Abstract

This paper develops structural stability tests based on the Efficient Method of Moments for the case of a known breakpoint. Computationally attractive post-sample estimators and test-statistics for structural stability are proposed, which are modifications of the Lagrange Multiplier, Likelihood Ratio, Wald and Hansen tests for structural stability. The modifications retain the asymptotic optimality properties against certain local alternatives of those based on efficient computationally intensive estimators for the post-sample data. Evaluation of these tests is performed in the context of stochastic volatility models. For these types of models and datasets, readily available structural stability tests are important as these models are used in the pricing of options where the arrival of new data constantly raises the issue of whether the estimates are in need of updating. A Monte Carlo study gives encouraging results for the computationally attractive tests. An application is made to stochastic volatility models for daily returns of the S&P500 index ranging from 1981 to 1993. The tests do not reject the null hypothesis of structural stability for the final model.

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Bibliographic Info

Article provided by Royal Economic Society in its journal The Econometrics Journal.

Volume (Year): 1 (1998)
Issue (Month): ConferenceIssue ()
Pages: C203-C227

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Handle: RePEc:ect:emjrnl:v:1:y:1998:i:conferenceissue:p:c203-c227

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Keywords: Efficient Method of Moments; Parameter updates; Stochastic volatility models; Structural stability tests with known breakpoint.;

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References

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  1. Pieter J. van der Sluis, 1998. "EmmPack 1.01: C/C++ Code for Use with Ox for Estimation of Univariate Stochastic Volatility Models with the Efficient Method of Moments," Tinbergen Institute Discussion Papers 98-021/4, Tinbergen Institute.
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  9. Hoffman, D. & Pagan, A., 1988. "Post-Sample Prediction Tests For Generalized Method Of Moment Estimators," RCER Working Papers 129, University of Rochester - Center for Economic Research (RCER).
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Citations

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Cited by:
  1. Peter N Smith & Michael R Wickens, . "Asset Pricing with Observable Stochastic Discount Factors," Discussion Papers 02/03, Department of Economics, University of York.
  2. George J. Jiang & Pieter J. van der Sluis, 1998. "Pricing Stock Options under Stochastic Volatility and Stochastic Interest Rates with Efficient Method of Moments Estimation," Tinbergen Institute Discussion Papers 98-067/4, Tinbergen Institute.
  3. van der Sluis Pieter J., 1997. "EmmPack 1.01: C/C++ Code for Use with Ox for Estimation of Univariate Stochastic Volatility Models with the Efficient Method of Moments," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 2(3), pages 1-20, October.
  4. Pieter J. van der Sluis, 1998. "Structural Stability Tests with Unknown Breakpoint for the Efficient Method of Moments with Application to Stochastic Volatility Models," Tinbergen Institute Discussion Papers 98-055/4, Tinbergen Institute.
  5. Carmen Broto & Esther Ruiz, 2002. "Estimation Methods For Stochastic Volatility Models: A Survey," Statistics and Econometrics Working Papers ws025414, Universidad Carlos III, Departamento de Estadística y Econometría.
  6. Pieter J. van der Sluis, 1997. "Post-Sample Prediction Tests for the Efficient Method of Moments," Tinbergen Institute Discussion Papers 97-054/4, Tinbergen Institute.

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