Structural Break Tests Robust to Regression Misspecification
CentER Discussion Paper Series No. 2016-019
39 Pages Posted: 10 May 2016 Last revised: 22 Aug 2022
Date Written: May 2, 2016
Abstract
Structural break tests developed in the literature 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. Hence, we propose using it as an alternative and complementary test for breaks. While the conditional tests based on dynamic regression models detect breaks in the mean and variance of the US unemployment growth and interest rate growth series around the Great Moderation, the evidence for these breaks disappears when using the unconditional tests. Therefore, there is no evidence of long-run mean or volatility shifts in unemployment growth and interest rate growth.
Keywords: structural change, sup Wald test, dynamic misspecification
JEL Classification: C01, C12
Suggested Citation: Suggested Citation