Consistent Testing for Structural Change at the Ends of the Sample

• Activity Number: 94
• Type: Topic Contributed
• Date/Time: Monday, August 12, 2002 : 10:30 AM to 12:20 PM
• Sponsor: Business & Economics Statistics Section*
• Author(s): Michael McCracken*+
• Affiliation(s): University of Missouri, Columbia
• Keywords: structural change ; Chow test ; predictive test ; intercept correction

Abstract

In this paper we provide analytical evidence that Wald (Chow, 1960) and Predictive (Ghysels and Hall, 1990) tests can be consistent against alternatives that allow structural change to occur at either end of the sample. Attention is restricted to linear regression models. The results are based on a reparameterization of the actual and potential break-point locations. Standard methods parameterize both of these locations as fixed fractions of the sample size. We parameterize these locations as more general integer valued functions. Power at the ends of the sample is evaluated by letting both locations, as a percentage of the sample size, converge to zero or one. We find that for a potential break point function R, the tests are consistent against alternatives that converge to zero or one at sufficiently slow rates and are inconsistent against alternatives that converge sufficiently quickly. These rates provide some guidance as to the choice of bandwidth for intercept corrections. Monte Carlo evidence supports the theory, though large samples are needed for good power.