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A Joint Chow Test for Structural Instability

Author

Listed:
  • Bent Nielsen

    (Department of Economics, University of Oxford & Institute of Economic Modelling & Nuffield College, Oxford OX1 1NF, UK)

  • Andrew Whitby

    (The World Bank, 1818 H Street NW, Washington DC 20433, USA)

Abstract

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 one-step recursive Chow test (based on the sequence of studentised recursive residuals) and its supremum counterpart, which relaxes these requirements. We use results on the strong consistency of regression estimators to show that the one-step test is appropriate for stationary, unit root or explosive processes modelled in the autoregressive distributed lags (ADL) framework. We then use the 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 the normality of errors and is intended to be used in situations where this can be either assumed nor 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 U.K. GDP data is given.

Suggested Citation

  • Bent Nielsen & Andrew Whitby, 2015. "A Joint Chow Test for Structural Instability," Econometrics, MDPI, vol. 3(1), pages 1-31, March.
    • Handle: RePEc:gam:jecnmx:v:3:y:2015:i:1:p:156-186:d:46757
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    References listed on IDEAS

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    1. Kilian, Lutz & Demiroglu, Ufuk, 2000. "Residual-Based Tests for Normality in Autoregressions: Asymptotic Theory and Simulation Evidence," Journal of Business & Economic Statistics, American Statistical Association, vol. 18(1), pages 40-50, January.
    2. Davidson, James, 1994. "Stochastic Limit Theory: An Introduction for Econometricians," OUP Catalogue, Oxford University Press, number 9780198774037.
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    5. Nielsen, Bent, 2005. "Strong Consistency Results For Least Squares Estimators In General Vector Autoregressions With Deterministic Terms," Econometric Theory, Cambridge University Press, vol. 21(3), pages 534-561, June.
    6. Peter Burridge & A. M. Robert Taylor, 2006. "Additive Outlier Detection Via Extreme‐Value Theory," Journal of Time Series Analysis, Wiley Blackwell, vol. 27(5), pages 685-701, September.
    7. Bauer, Dietmar, 2009. "Almost Sure Bounds On The Estimation Error For Ols Estimators When The Regressors Include Certain Mfi(1) Processes," Econometric Theory, Cambridge University Press, vol. 25(2), pages 571-582, April.
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    16. D. W. K. Andrews, 2003. "End-of-Sample Instability Tests," Econometrica, Econometric Society, vol. 71(6), pages 1661-1694, November.
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    18. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-856, July.
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    Cited by:

    1. Carlos Jurado-Rivas & Marcelino Sánchez-Rivero, 2022. "Investigating Change in the Willingness to Pay for a More Sustainable Tourist Destination in a World Heritage City," Land, MDPI, vol. 11(3), pages 1-10, March.
    2. Mayer, Alexander, 2020. "(Consistently) testing strict exogeneity against the alternative of predeterminedness in linear time-series models," Economics Letters, Elsevier, vol. 193(C).
    3. Vassili Bazinas & Bent Nielsen, 2015. "Causal transmission in reduced-form models," Economics Papers 2015-W07, Economics Group, Nuffield College, University of Oxford.
    4. Jonas Harnau, 2018. "Misspecification Tests for Log-Normal and Over-Dispersed Poisson Chain-Ladder Models," Risks, MDPI, vol. 6(2), pages 1-25, March.
    5. Ragnar Nymoen, 2017. "Between Institutions and Global Forces: Norwegian Wage Formation Since Industrialisation," Econometrics, MDPI, vol. 5(1), pages 1-54, January.
    6. Vassilios Bazinas & Bent Nielsen, 2022. "Causal Transmission in Reduced-Form Models," Econometrics, MDPI, vol. 10(2), pages 1-25, March.

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    More about this item

    Keywords

    Chow test; autoregressive distributed lag model; non-stationarity;
    All these keywords.

    JEL classification:

    • B23 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Econometrics; Quantitative and Mathematical Studies
    • C - Mathematical and Quantitative Methods
    • C00 - Mathematical and Quantitative Methods - - General - - - General
    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • C4 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • C8 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs

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