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Robustness of the CUSUM and CUSUM-of-Squares Tests to Serial Correlation, Endogeneity and Lack of Structural Invariance. Some Monte Carlo Evidence

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Author Info

  • Caporale, Guglielmo Maria

    (London South Bank University)

  • Pittis, Nikitas

    (University of Piraeus)

Abstract

This paper investigates by means of Monte Carlo techniques the robustness of the CUSUM and CUSUM-of-squares tests (Brown et al., 1975) to serial correlation, endogeneity and lack of structural invariance. Our findings suggest that these tests perform better in the context of a dynamic model of the ADL type, which is not affected by serial correlation or nonpredetermined regressors even if over-specified. In this case, the empirical sizes of both tests are close to the nominal ones, whether a stationary or a cointegration environment is considered. The CUSUM-of-squares test is to be preferred, as it is very powerful to detect changes in the conditional model parameters, whether or not the variance of the regression error is included in the set of parameters shifting, especially towards the end of the sample.

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File URL: http://www.ihs.ac.at/publications/eco/es-157.pdf
File Function: First version, 2004
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Bibliographic Info

Paper provided by Institute for Advanced Studies in its series Economics Series with number 157.

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Length: 25 pages
Date of creation: May 2004
Date of revision:
Handle: RePEc:ihs:ihsesp:157

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Related research

Keywords: CUSUM and CUSUM-of-squares tests; Parameter instability; Structural invariance; Marginal and conditional processes; ADL model;

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  1. Martin MORYSON, 1994. "Testing for Random Walk Coefficients in a Simple State Space Model," SFB 373 Discussion Papers 1994,21, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  2. repec:cup:etheor:v:6:y:1990:i:3:p:335-47 is not listed on IDEAS
  3. Zhijie Xiao & Peter C.B. Phillips, 2001. "A CUSUM Test for Cointegration Using Regression Residuals," Cowles Foundation Discussion Papers 1329, Cowles Foundation for Research in Economics, Yale University.
  4. Park, Joon Y. & Phillips, Peter C.B., 1989. "Statistical Inference in Regressions with Integrated Processes: Part 2," Econometric Theory, Cambridge University Press, vol. 5(01), pages 95-131, April.
  5. King, Maxwell L., 1985. "A point optimal test for autoregressive disturbances," Journal of Econometrics, Elsevier, vol. 27(1), pages 21-37, January.
  6. Peter C.B. Phillips, 1988. "Reflections on Econometric Methodology," Cowles Foundation Discussion Papers 893, Cowles Foundation for Research in Economics, Yale University.
  7. Hansen, Bruce E., 2000. "Testing for structural change in conditional models," Journal of Econometrics, Elsevier, vol. 97(1), pages 93-115, July.
  8. Ploberger, Werner & Kramer, Walter, 1992. "The CUSUM Test with OLS Residuals," Econometrica, Econometric Society, vol. 60(2), pages 271-85, March.
  9. 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.
  10. Kramer, Walter & Ploberger, Werner & Alt, Raimund, 1988. "Testing for Structural Change in Dynamic Models," Econometrica, Econometric Society, vol. 56(6), pages 1355-69, November.
  11. Ploberger, Werner & Krämer;, Walter, 1990. "The Local Power of the CUSUM and CUSUM of Squares Tests," Econometric Theory, Cambridge University Press, vol. 6(03), pages 335-347, September.
  12. Phillips, Peter C B & Hansen, Bruce E, 1990. "Statistical Inference in Instrumental Variables Regression with I(1) Processes," Review of Economic Studies, Wiley Blackwell, vol. 57(1), pages 99-125, January.
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