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Testing for Breaks in Coefficients and Error Variance: Simulations and Applications

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Author Info
Jing Zhou () (BlackRock, Inc.)
Pierre Perron () (Boston University)

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Abstract

In a companion paper, Perron and Zhou (2008) provided a comprehensive treatment of the problem of testing jointly for structural change in both the regression coefficients and the variance of the errors in a single equation regression model involving stationary regressors, allowing the break dates for the two components to be different or overlap. The aim of this paper is twofold. First, we present detailed simulation analyses to document various issues related to their procedures: a) the inadequacy of the two step procedures that are commonly applied; b) which particular version of the necessary correction factor exhibits better finite sample properties; c) whether applying a correction that is valid under more general conditions than necessary is detrimental to the size and power of the tests; d) the finite sample size and power of the various tests proposed; e) the performance of the sequential method in determining the number and types of breaks present. Second, we apply their testing procedures to various macroeconomic time series studied by Stock and Watson (2002). Our results reinforce the prevalence of change in mean, persistence and variance of the shocks to these series, and the fact that for most of them an important reduction in variance occurred during the 1980s. In many cases, however, the so-called “great moderation” should instead be viewed as a “great reversion”.

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Publisher Info
Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - Working Papers Series with number wp2008-010.

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Length: 43
Date of creation: Jul 2008
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Handle: RePEc:bos:wpaper:wp2008-010

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Related research
Keywords: Change-point; Variance shift; Conditional heteroskedasticity; Likelihood ratio tests; the “Great moderation.”;

Find related papers by JEL classification:
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Marianne Sensier & Dick van Dijk, 2004. "Testing for Volatility Changes in U.S. Macroeconomic Time Series," The Review of Economics and Statistics, MIT Press, vol. 86(3), pages 833-839, 08. [Downloadable!] (restricted)
    Other versions:
  2. Pierre Perron & Jing Zhou, 2008. "Testing Jointly for Structural Changes in the Error Variance and Coefficients of a Linear Regression Model," Boston University - Department of Economics - Working Papers Series wp2008-011, Boston University - Department of Economics. [Downloadable!]
  3. James H. Stock & Mark W. Watson, 2002. "Has the Business Cycle Changed and Why?," NBER Working Papers 9127, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Herrera, Ana Maria & Pesavento, Elena, 2005. "The Decline in U.S. Output Volatility: Structural Changes and Inventory Investment," Journal of Business & Economic Statistics, American Statistical Association, vol. 23, pages 462-472, October. [Downloadable!] (restricted)
  5. Andrews, Donald W K, 1991. "Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation," Econometrica, Econometric Society, vol. 59(3), pages 817-58, May. [Downloadable!] (restricted)
    Other versions:
  6. Olivier Blanchard & John Simon, 2001. "The Long and Large Decline in U.S. Output Volatility," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(2001-1), pages 135-174. [Downloadable!]
  7. Mohitosh Kejriwal & Pierre Perron, 2006. "Testing for Multiple Structural Changes in Cointegrated Regression Models," Boston University - Department of Economics - Working Papers Series WP2006-051, Boston University - Department of Economics. [Downloadable!]
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  8. Margaret M. McConnell & Gabriel Perez-Quiros, 2000. "Output Fluctuations in the United States: What Has Changed since the Early 1980's?," American Economic Review, American Economic Association, vol. 90(5), pages 1464-1476, December. [Downloadable!] (restricted)
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  9. Jushan Bai & Pierre Perron, 2003. "Critical values for multiple structural change tests," Econometrics Journal, Royal Economic Society, vol. 6(1), pages 72-78, 06. [Downloadable!] (restricted)
  10. Jushan Bai & Pierre Perron, 1998. "Estimating and Testing Linear Models with Multiple Structural Changes," Econometrica, Econometric Society, vol. 66(1), pages 47-78, January.
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  11. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-56, July. [Downloadable!] (restricted)
    Other versions:
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