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Parametric and Semiparametric Efficient Tests for Parameter Instability

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  • Dong Jin Lee

    (University of Connecticut)

Abstract

This paper proposes asymptotically point optimal tests for parameter instability under the feasible circumstance that the researcher has little information about the unstable parameter process and the error distribution. The shape of the unstable parameter process is not identified but is asymptotically described by the Winer process, which is weak enough to cover a wide range of structural breaks and time varying parameter processes. I first derive a test under known error distribution, and show that the test is asymptotically equivalent to likelihood ratio tests for correctly identified unstable parameter processes under suitable conditions. The test is then extended to semiparametric models in which the underlying distribution is unknown but treated as an infinite dimensional nuisance parameter. An adaptive test is shown to be attainable without further restrictive conditions on the error distribution, which implies that the semiparametric power envelope is asymptotically equivalent to that of parametric models.

Suggested Citation

  • Dong Jin Lee, 2008. "Parametric and Semiparametric Efficient Tests for Parameter Instability," Working papers 2008-40, University of Connecticut, Department of Economics, revised Aug 2009.
  • Handle: RePEc:uct:uconnp:2008-40
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    File URL: http://web2.uconn.edu/economics/working/2008-40r.pdf
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    Cited by:

    1. Maxwell L. King & Sivagowry Sriananthakumar, 2015. "Point Optimal Testing: A Survey of the Post 1987 Literature," Monash Econometrics and Business Statistics Working Papers 5/15, Monash University, Department of Econometrics and Business Statistics.

    More about this item

    Keywords

    Adaptation; optimal test; parameter instability; semiparametric modl; semiparametric power envelope; structural break; time varying parameter;

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: 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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