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Testing For Structural Breaks

Author

Listed:
  • Allan Gregory

    (B.A. (Toronto), Ph.D. (Queen's))

  • James M. Nason

    (Federal Reserve Bank of Atlanta)

Abstract

The purpose of this paper is to investigate the tests of Hansen (1991) to detect structural breaks in cointegrated relations using Monte Carlo methods. The evaluation takes place within the linear quadratic model. The evidence for a single regressor suggests that the test have proper size and that the power is good provided the cost of adjustment is low. In addition to the tests of Hansen, we consider the sensitivity of the augmented Dicky-Fuller (ADF) teest for cointegration in the presence of a structural break. Our Monte Carlo experiments show that the ADF test suffers a substantial loss of power (a failure to reject the null of no cointegration). As a practical example we consider the stability of the long-run coefficients in annual U.S. money demand.

Suggested Citation

  • Allan Gregory & James M. Nason, 1991. "Testing For Structural Breaks," Working Paper 827, Economics Department, Queen's University.
    • Handle: RePEc:qed:wpaper:827
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    File URL: https://www.econ.queensu.ca/sites/econ.queensu.ca/files/qed_wp_827.pdf
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    Citations

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    Cited by:

    1. Olusegun A. Omisakin & Abimbola M. Oyinlola & Oluwatosin A. Adeniyi, 2012. "Modeling Gasoline Demand with Structural Breaks:New Evidence from Nigeria," International Journal of Energy Economics and Policy, Econjournals, vol. 2(1), pages 1-9.
    2. Kuikeu, Oscar, 2011. "Comment la dernière crise financière a relancé le débat relatif à l'arrimage du fcfa à l'euro [How the recent financial crisis have revived the debate on the parity between fcfa and euro]," MPRA Paper 32077, University Library of Munich, Germany.
    3. Kuikeu, Oscar, 2011. "Arguments contre la zone franc [Against the cfa franc zone]," MPRA Paper 33710, University Library of Munich, Germany.
    4. Olusegun A. Omisakin & Oluwatosin A. Adeniyi & Abimbola M. Oyinlola, 2012. "Structural Breaks, Parameter Stability and Energy Demand Modeling in Nigeria," International Journal of Business and Economic Sciences Applied Research (IJBESAR), International Hellenic University (IHU), Kavala Campus, Greece (formerly Eastern Macedonia and Thrace Institute of Technology - EMaTTech), vol. 5(2), pages 129-144, August.
    5. Loesse Jacques Esso, 2010. "Re-Examining The Finance-Growth Nexus: Structural Break, Threshold Cointegration And Causality Evidence From The Ecowas," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 35(3), pages 57-79, September.
    6. Kuo, Biing-Shen, 1998. "Test for partial parameter instability in regressions with I(1) processes," Journal of Econometrics, Elsevier, vol. 86(2), pages 337-368, June.
    7. Portes, Richard & Palladini, Giorgia, 2011. "Sovereign CDS and Bond Pricing Dynamics in the Euro-area," CEPR Discussion Papers 8651, C.E.P.R. Discussion Papers.
    8. Muhammad Saeed & Zulqarnain Haider, 2021. "Does Financial Development Advanced Environmental Quality in Thailand: Evidenced from ARDL," iRASD Journal of Energy and Environment, International Research Association for Sustainable Development (iRASD), vol. 2(2), pages 90-101, December.
    9. Gordon de Brouwer & Irene Ng & Robert Subbaraman, 1993. "The Demand for Money in Australia: New Tests on an Old Topic," RBA Research Discussion Papers rdp9314, Reserve Bank of Australia.
    10. Di Iorio, Francesca & Fachin, Stefano, 2006. "Testing for breaks in cointegrated panels," MPRA Paper 3280, University Library of Munich, Germany.
    11. Funke, Michael, 2001. "Money demand in Euroland," Journal of International Money and Finance, Elsevier, vol. 20(5), pages 701-713, October.
    12. Michael D. Bordo & Lars Jonung & Pierre Siklos, 1993. "The Common Development of Institutional Change as Measured by Income Velocity: A Century of Evidence from Industrialized Countries," NBER Working Papers 4379, National Bureau of Economic Research, Inc.
    13. Brian Ferguson, 1996. "Expenditure on physicians' services in Canada: Was Medicare a structural change?," Health Economics, John Wiley & Sons, Ltd., vol. 5(5), pages 409-419, September.
    14. Karfakis, Costas I & Parikh, Ashok, 1993. "A Cointegration Approach to Monetary Targeting in Australia," Australian Economic Papers, Wiley Blackwell, vol. 32(60), pages 53-72, June.
    15. James M. Nason, 1991. "The permanent income hypothesis when the bliss point is stochastic," Discussion Paper / Institute for Empirical Macroeconomics 46, Federal Reserve Bank of Minneapolis.
    16. Steven Cook, 2004. "Spurious rejection by cointegration tests incorporating structural change in the cointegrating relationship," Applied Economics Letters, Taylor & Francis Journals, vol. 11(14), pages 879-884.
    17. Alain Durré, 2006. "The Liquidity Premium in the Money Market: A Comparison of the German Mark Period and the Euro Area," German Economic Review, Verein für Socialpolitik, vol. 7, pages 163-187, May.

    More about this item

    Keywords

    structural breaks; linear quadratic; cointegration;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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