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On detecting end-of-sample instabilities

Author

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  • Fabio Busetti

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Abstract

Tests of parameter instabilities are likely to have low power when change-points occur towards the end of the sample. This paper considers various modifications of existing tests and introduces new statistics designed to have high power in such circumstances. The properties of both Wald-type tests of a one-time shift in the parameters and locally most powerful (LMP) tests against the hypothesis of random walk coefficients are examined. It is proposed to take functionals of the Wald and LMP statistics such that either the set of possible change-points is restricted to the last part of the sample or the occurrence of change-points is given increasing weight throughout the sample. For the case of an unknown end-of-sample change-point, the LMP-type tests appear to have, in general, better properties than Wald-type tests, even against the hypothesis of a one-time shift in the parameters. Empirical illustrations describe the use of the tests for detecting structural changes at the time of the 'Great Recession'.

Suggested Citation

  • Fabio Busetti, 2012. "On detecting end-of-sample instabilities," Temi di discussione (Economic working papers) 881, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:wptemi:td_881_12
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    File URL: http://www.bancaditalia.it/pubblicazioni/temi-discussione/2012/2012-0881/en_tema_881.pdf
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    References listed on IDEAS

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    1. Jushan Bai, 1997. "Estimation Of A Change Point In Multiple Regression Models," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 551-563, November.
    2. Jushan Bai & Pierre Perron, 1998. "Estimating and Testing Linear Models with Multiple Structural Changes," Econometrica, Econometric Society, vol. 66(1), pages 47-78, January.
    3. D. W. K. Andrews, 2003. "End-of-Sample Instability Tests," Econometrica, Econometric Society, vol. 71(6), pages 1661-1694, November.
    4. Nyblom, Jukka & Harvey, Andrew, 2000. "Tests Of Common Stochastic Trends," Econometric Theory, Cambridge University Press, vol. 16(02), pages 176-199, April.
    5. Hansen, Bruce E., 2000. "Testing for structural change in conditional models," Journal of Econometrics, Elsevier, vol. 97(1), pages 93-115, July.
    6. Graham Elliott & Ulrich K. Muller, 2006. "Efficient Tests for General Persistent Time Variation in Regression Coefficients," Review of Economic Studies, Oxford University Press, vol. 73(4), pages 907-940.
    7. Andrews, Donald W K & Ploberger, Werner, 1994. "Optimal Tests When a Nuisance Parameter Is Present Only under the Alternative," Econometrica, Econometric Society, vol. 62(6), pages 1383-1414, November.
    8. Andrews, Donald W.K. & Kim, Jae-Young, 2006. "Tests for Cointegration Breakdown Over a Short Time Period," Journal of Business & Economic Statistics, American Statistical Association, vol. 24, pages 379-394, October.
    9. 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.
    10. Inoue, Atsushi, 2001. "Testing For Distributional Change In Time Series," Econometric Theory, Cambridge University Press, vol. 17(01), pages 156-187, February.
    11. Fabio Busetti & Andrew Harvey, 2011. "When is a Copula Constant? A Test for Changing Relationships," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 9(1), pages 106-131, Winter.
    12. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-856, July.
    13. Busetti, Fabio & Taylor, A. M. Robert, 2004. "Tests of stationarity against a change in persistence," Journal of Econometrics, Elsevier, vol. 123(1), pages 33-66, November.
    14. Fabio Busetti & Andrew Harvey, 2010. "Tests of strict stationarity based on quantile indicators," Journal of Time Series Analysis, Wiley Blackwell, vol. 31(6), pages 435-450, November.
    15. Ploberger, Werner & Kramer, Walter & Kontrus, Karl, 1989. "A new test for structural stability in the linear regression model," Journal of Econometrics, Elsevier, vol. 40(2), pages 307-318, February.
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    Cited by:

    1. Marianna Riggi & Fabrizio Venditti, 2014. "Surprise! Euro area inflation has fallen," Questioni di Economia e Finanza (Occasional Papers) 237, Bank of Italy, Economic Research and International Relations Area.
    2. Fabio Busetti & Pietro Cova & Antonio Maria Conti & Filippo Scoccianti & Libero Monteforte & Giordano Zevi & Valentina Aprigliano & Andrea Gerali & Alberto Locarno & Alessandro Notarpietro & Massimili, 2014. "The effects of the crisis on production potential and household spending in Italy," Workshop and Conferences 18, Bank of Italy, Economic Research and International Relations Area.

    More about this item

    Keywords

    structural breaks; time-varying parameters;

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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