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Confidence sets for the date of a single break in linear time series regressions

Listed author(s):
  • Elliott, Graham
  • Muller, Ulrich K.

We consider the problem of constructing confidence sets for the date of a single break in a linear time series regression. We establish analytically and by small sample simulation that he currently standard method in econometrics to construct such intervals has a coverage rate far below nominal levels when breaks are of moderate magnitude. Given that such breaks are a theoretically and empirically highly relevant phenomenon, we proceed to develop an appropriate alternative. We suggest constructing confidence sets by inverting a sequence of tests. Each test maintains a specific break date under the null hypothesis, and rejects when a break occurs elsewhere. By inverting a certain variant of a modified locally best invariant test, we ensure that the asymptotic critical value does not depend on the maintained break date. A valid confidence set can hence be obtained by assessing which of the sequence of test statistics exceeds a single number.

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File URL: http://www.sciencedirect.com/science/article/pii/S0304-4076(07)00040-1
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Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 141 (2007)
Issue (Month): 2 (December)
Pages: 1196-1218

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Handle: RePEc:eee:econom:v:141:y:2007:i:2:p:1196-1218
Contact details of provider: Web page: http://www.elsevier.com/locate/jeconom

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