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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

  • Caporale, Guglielmo Maria

    (London South Bank University)

  • Pittis, Nikitas

    (University of Piraeus)

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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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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  1. 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.
  2. Hansen, Bruce E, 2002. "Tests for Parameter Instability in Regressions with I(1) Processes," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 45-59, January.
  3. Peter C.B. Phillips, 1988. "Reflections on Econometric Methodology," Cowles Foundation Discussion Papers 893, Cowles Foundation for Research in Economics, Yale University.
  4. Bruce E. Hansen, 1998. "Testing for Structural Change in Conditional Models," Boston College Working Papers in Economics 310., Boston College Department of Economics.
  5. Kramer, Walter & Ploberger, Werner & Alt, Raimund, 1988. "Testing for Structural Change in Dynamic Models," Econometrica, Econometric Society, vol. 56(6), pages 1355-69, November.
  6. Ploberger, Werner & Kramer, Walter, 1992. "The CUSUM Test with OLS Residuals," Econometrica, Econometric Society, vol. 60(2), pages 271-85, March.
  7. 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.
  8. repec:cup:etheor:v:6:y:1990:i:3:p:335-47 is not listed on IDEAS
  9. Xiao, Zhijie & Phillips, Peter C. B., 2002. "A CUSUM test for cointegration using regression residuals," Journal of Econometrics, Elsevier, vol. 108(1), pages 43-61, May.
  10. King, Maxwell L., 1985. "A point optimal test for autoregressive disturbances," Journal of Econometrics, Elsevier, vol. 27(1), pages 21-37, January.
  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. 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.
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