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Variance Shifts, Structural Breaks, and Stationarity Tests

Listed author(s):
  • Busetti, Fabio
  • Taylor, A M Robert

This article considers the problem of testing the null hypothesis of stochastic stationarity in time series characterized by variance shifts at some (known or unknown) point in the sample. It is shown that existing stationarity tests can be severely biased in the presence of such shifts, either oversized or undersized, with associated spurious power gains or losses, depending on the values of the breakpoint parameter and on the ratio of the prebreak to postbreak variance. Under the assumption of a serially independent Gaussian error term with known break date and known variance ratio, a locally best invariant (LBI) test of the null hypothesis of stationarity in the presence of variance shifts is then derived. Both the test statistic and its asymptotic null distribution depend on the breakpoint parameter and also, in general, on the variance ratio. Modifications of the LBI test statistic are proposed for which the limiting distribution is independent of such nuisance parameters and belongs to the family of Cramer-von Mises distributions. One such modification is particularly appealing in that it is simultaneously exact invariant to variance shifts and to structural breaks in the slope and/or level of the series. Monte Carlo simulations demonstrate that the power loss from using our modified statistics in place of the LBI statistic is not large, even in the neighborhood of the null hypothesis, and particularly for series with shifts in the slope and/or level. The tests are extended to cover the cases of weakly dependent error processes and unknown breakpoints. The implementation of the tests are illustrated using output, inflation, and exchange rate data series.

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Article provided by American Statistical Association in its journal Journal of Business and Economic Statistics.

Volume (Year): 21 (2003)
Issue (Month): 4 (October)
Pages: 510-531

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Handle: RePEc:bes:jnlbes:v:21:y:2003:i:4:p:510-31
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