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Testing Parameter Stability: A Wild Bootstrap Approach

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  • O'Reilly, Gerard

    (Central Bank and Financial Services Authority of Ireland)

  • Whelan, Karl

    (Central Bank and Financial Services Authority of Ireland)

Abstract

Unknown-breakpoint tests for possible structural change have become standard in recent years, with the most popular being the so-called Sup-F tests, whose asymptotic distribution was derived by Andrews (1993). We highlight two problems that lead to poor performance when testing for structural breaks in dynamic time series models using the Andrews critical values: High persistence of explanatory variables and heteroskedasticity. We propose a so-called ``wild bootstrap'' approach to generating critical values for the Sup-F statistic and report that this approach performs well across a wide variety of possible data generating processes, including those with large coefficients on lagged dependent variables and heteroskedasticity.

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File URL: http://www.centralbank.ie/publications/documents/8RT05.pdf
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Bibliographic Info

Paper provided by Central Bank of Ireland in its series Research Technical Papers with number 8/RT/05.

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Length: 29 pages
Date of creation: Dec 2005
Date of revision:
Handle: RePEc:cbi:wpaper:8/rt/05

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  1. Todd E. Clark, 2006. "Disaggregate evidence on the persistence of consumer price inflation," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(5), pages 563-587.
  2. Godfrey, L.G. & Tremayne, A.R., 2005. "The wild bootstrap and heteroskedasticity-robust tests for serial correlation in dynamic regression models," Computational Statistics & Data Analysis, Elsevier, vol. 49(2), pages 377-395, April.
  3. Margaret M. McConnell & Gabriel Perez Quiros, 1997. "Output fluctuations in the United States: what has changed since the early 1980s?," Research Paper 9735, Federal Reserve Bank of New York.
  4. Davidson, Russell & Flachaire, Emmanuel, 2008. "The wild bootstrap, tamed at last," Journal of Econometrics, Elsevier, vol. 146(1), pages 162-169, September.
  5. Fagan, Gabriel & Henry, Jérôme & Mestre, Ricardo, 2001. "An area-wide model (AWM) for the euro area," Working Paper Series 0042, European Central Bank.
  6. 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.
  7. Andrew Levin & Jeremy Piger, 2003. "Is Inflation Persistence Intrinsic in Industrial Economies?," Computing in Economics and Finance 2003 298, Society for Computational Economics.
  8. Bruce E. Hansen, 1999. "The Grid Bootstrap And The Autoregressive Model," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 594-607, November.
  9. Donald W.K. Andrews & Werner Ploberger, 1992. "Optimal Tests When a Nuisance Parameter Is Present Only Under the Alternative," Cowles Foundation Discussion Papers 1015, Cowles Foundation for Research in Economics, Yale University.
  10. Lawrence J. Christiano, 1988. "Searching For a Break in GNP," NBER Working Papers 2695, National Bureau of Economic Research, Inc.
  11. Hansen, Bruce E., 2000. "Testing for structural change in conditional models," Journal of Econometrics, Elsevier, vol. 97(1), pages 93-115, July.
  12. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
  13. James H. Stock, 1991. "Confidence Intervals for the Largest Autoresgressive Root in U.S. Macroeconomic Time Series," NBER Technical Working Papers 0105, National Bureau of Economic Research, Inc.
  14. Gadzinski, Gregory & Orlandi, Fabrice, 2004. "Inflation persistence in the European Union, the euro area, and the United States," Working Paper Series 0414, European Central Bank.
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Cited by:
  1. Stefan Gerlach & Peter Tillmann, 2011. "Inflation Targeting and Inflation Persistence in Asia-Pacific," Working Papers 252011, Hong Kong Institute for Monetary Research.
  2. Peter Tillmann, 2010. "The changing nature of inflation persistence in Switzerland," Empirica, Springer, vol. 37(4), pages 445-453, November.

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