Grid-Bootstrap Methods vs. Bayesian Analysis. Testing for Structural Breaks in the Conditional Variance of Nominal Interest Rate Spreads - Four Cases in Europe
I use numerical methods to test for the presence of one-time structural breaks in the conditional variance of nominal interest rate spreads in four European countries over a period of eleven years (Jan 1988 to Dec 1998). I start with an intuitive approach consisting of a sequence of breakpoint Chow tests performed at subsequent dates over a given subsample of the squared residuals of the autoregressions used to model the yield spreads. Results from this procedure are misleading and spurious to some extent because of the incorrect critical values produced, which make the interpretation of the test stastistics basically unreliable. I then switch to large Monte Carlo simulations and to a fixed-regressor grid-bootstrap method to derive the right critical values and refine the previous conclusions. Finally, I utilize classical Bayesian econometrics to estimate alternative models for the series of nominal spreads and to detect potential shifts in the innovation variances of the equations describing the data. Outcomes need some interpretation: in the cases of Germany and Spain a break might have occurred in 1990 and 1994 respectively, as derived from the grid bootstrap approach. Likewise, there is evidence of a shift in the case of France in 1996 according to the Bayesian techniques employed, which also validate the hypothesis of a break for Italian yield spreads in 1995.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Andrews, Donald W K & Chen, Hong-Yuan, 1994. "Approximately Median-Unbiased Estimation of Autoregressive Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(2), pages 187-204, April.
- Levin, Andrew T. & Piger, Jeremy M., 2004.
"Is inflation persistence intrinsic in industrial economies?,"
Working Paper Series
0334, European Central Bank.
- Andrew T. Levin & Jeremy M. Piger, 2003. "Is inflation persistence intrinsic in industrial economies?," Working Papers 2002-023, Federal Reserve Bank of St. Louis.
- Andrew Levin & Jeremy Piger, 2003. "Is Inflation Persistence Intrinsic in Industrial Economies?," Computing in Economics and Finance 2003 298, Society for Computational Economics.
- Andrews, Donald W K & Ploberger, Werner, 1994.
"Optimal Tests When a Nuisance Parameter Is Present Only under the Alternative,"
Econometric Society, vol. 62(6), pages 1383-1414, November.
- Tom Doan, . "APGRADIENTTEST: RATS procedure to perform Andrews-Ploberger Structural Break Test for GARCH/Maximum Likelihood," Statistical Software Components RTS00007, Boston College Department of Economics.
- Donald W.K. Andrews & Werner Ploberger, 1992. "Optimal Tests When a Nuisance Parameter Is Present Only Under the Alternative," Cowles Foundation Discussion Papers 1015, Cowles Foundation for Research in Economics, Yale University.
- Tom Doan, . "APBREAKTEST: RATS procedure to implement Andrews-Ploberger Structural Break Test," Statistical Software Components RTS00006, Boston College Department of Economics.
- Tom Doan, . "REGHBREAK: RATS procedure to perform structural break test with bootstrapped p-values," Statistical Software Components RTS00176, Boston College Department of Economics.
- Bruce E. Hansen, 1998.
"Testing for Structural Change in Conditional Models,"
Boston College Working Papers in Economics
310., Boston College Department of Economics.
- Hansen, Bruce E., 2000. "Testing for structural change in conditional models," Journal of Econometrics, Elsevier, vol. 97(1), pages 93-115, July.
- Chib, Siddhartha, 1998. "Estimation and comparison of multiple change-point models," Journal of Econometrics, Elsevier, vol. 86(2), pages 221-241, June.
- Andrews, Donald W K, 1993.
"Tests for Parameter Instability and Structural Change with Unknown Change Point,"
Econometric Society, vol. 61(4), pages 821-56, July.
- Donald W.K. Andrews, 1990. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Cowles Foundation Discussion Papers 943, Cowles Foundation for Research in Economics, Yale University.
- repec:dgr:uvatin:20020084 is not listed on IDEAS
When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpem:0509011. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA)
If references are entirely missing, you can add them using this form.