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Stochastic Permanent Breaks

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Author Info
Robert F. Engle
Aaron D. Smith

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Abstract

This paper aims to bridge the gap between processes where shocks are permanent and those with transitory shocks by formulating a process in which the long run impact of each innovation is time varying and stochastic. Frequent transitory shocks are supplemented by occasional permanent shifts. The stochastic permanent breaks (STOPBREAK) process is based on the premise that a shock is more likely to be permanent if it is large than if it is small. This formulation is motivated by a class of processes that undergo random structural breaks. Consistency and asymptotic normality of quasi maximum likelihood estimates is established and locally best hypothesis tests of the null of a random walk are developed. The model is applied to relative prices of pairs of stocks and significant test statistics result.

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Paper provided by Department of Economics, UC San Diego in its series University of California at San Diego, Economics Working Paper Series with number 98-03.

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Date of creation: Jan 1998
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Handle: RePEc:cdl:ucsdec:98-03

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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. Hansen, Bruce E, 1992. "Tests for Parameter Instability in Regressions with I(1) Processes," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(3), pages 321-35, July.
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  2. de Jong, Robert M., 1997. "Central Limit Theorems for Dependent Heterogeneous Random Variables," Econometric Theory, Cambridge University Press, vol. 13(03), pages 353-367, June. [Downloadable!]
  3. repec:cup:etheor:v:13:y:1997:i:3:p:353-67 is not listed on IDEAS
  4. Stengos, Thanasis & Panas, E, 1992. "Testing the Efficiency of the Athens Stock Exchange: Some Results from the Banking Sector," Empirical Economics, Springer, vol. 17(2), pages 239-52.
  5. Schoenberg, Ronald, 1997. "Constrained Maximum Likelihood," Computational Economics, Springer, vol. 10(3), pages 251-66, August. [Downloadable!]
  6. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March. [Downloadable!] (restricted)
  7. Andrews, Donald W. K. & Lee, Inpyo & Ploberger, Werner, 1996. "Optimal changepoint tests for normal linear regression," Journal of Econometrics, Elsevier, vol. 70(1), pages 9-38, January. [Downloadable!] (restricted)
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  8. Granger, Clive W J, 1986. "Developments in the Study of Cointegrated Economic Variables," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(3), pages 213-28, August.
  9. repec:cup:etheor:v:11:y:1995:i:2:p:347-58 is not listed on IDEAS
  10. Granger, Clive W. J. & Swanson, Norman R., 1997. "An introduction to stochastic unit-root processes," Journal of Econometrics, Elsevier, vol. 80(1), pages 35-62, September. [Downloadable!] (restricted)
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  11. de Jong, R.M., 1995. "Laws of Large Numbers for Dependent Heterogeneous Processes," Econometric Theory, Cambridge University Press, vol. 11(02), pages 347-358, February. [Downloadable!]
  12. Chelley-Steeley, Patricia L & Pentecost, Eric J, 1994. "Stock Market Efficiency, the Small Firm Effect and Cointegration," Applied Financial Economics, Taylor and Francis Journals, vol. 4(6), pages 405-11, December. [Downloadable!] (restricted)
  13. Clements, Michael P & Hendry, David F, 1996. "Intercept Corrections and Structural Change," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(5), pages 475-94, Sept.-Oct. [Downloadable!] (restricted)
  14. Cerchi, Marlene & Havenner, Arthur, 1988. "Cointegration and stock prices : The random walk on wall street revisited," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 333-346. [Downloadable!] (restricted)
  15. 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)
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