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Structural Break Tests Robust to Regression Misspecification

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Department of Finance and Business Intelligence, AEGON Nederland, 2591 TV Den Haag, The Netherlands
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Department of Economics and CEPR, University of Cyprus, P.O. Box 20537, 1678 Nicosia, Cyprus
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Department of Econometrics and Operation Research and CentER, Tilburg University, P.O. Box 90153, 5000 LE Tilburg, The Netherlands
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Author to whom correspondence should be addressed.
Econometrics 2018, 6(2), 27; https://doi.org/10.3390/econometrics6020027
Received: 23 December 2017 / Revised: 5 May 2018 / Accepted: 14 May 2018 / Published: 22 May 2018
Structural break tests for regression models are sensitive to model misspecification. We show—analytically and through simulations—that the sup Wald test for breaks in the conditional mean and variance of a time series process exhibits severe size distortions when the conditional mean dynamics are misspecified. We also show that the sup Wald test for breaks in the unconditional mean and variance does not have the same size distortions, yet benefits from similar power to its conditional counterpart in correctly specified models. Hence, we propose using it as an alternative and complementary test for breaks. We apply the unconditional and conditional mean and variance tests to three US series: unemployment, industrial production growth and interest rates. Both the unconditional and the conditional mean tests detect a break in the mean of interest rates. However, for the other two series, the unconditional mean test does not detect a break, while the conditional mean tests based on dynamic regression models occasionally detect a break, with the implied break-point estimator varying across different dynamic specifications. For all series, the unconditional variance does not detect a break while most tests for the conditional variance do detect a break which also varies across specifications. View Full-Text
Keywords: structural change; sup Wald test; dynamic misspecification structural change; sup Wald test; dynamic misspecification
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Abi Morshed, A.; Andreou, E.; Boldea, O. Structural Break Tests Robust to Regression Misspecification. Econometrics 2018, 6, 27.

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