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

See all articles by Alaa Abi Morshed

Alaa Abi Morshed

Lancaster University

Elena Andreou

University of Cyprus - Department of Economics

Otilia Boldea

Tilburg University, CentER

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

Abi Morshed, Alaa and Andreou, Elena and Boldea, Otilia, Structural Break Tests Robust to Regression Misspecification (May 2, 2016). CentER Discussion Paper Series No. 2016-019, Available at SSRN: https://ssrn.com/abstract=2773555 or http://dx.doi.org/10.2139/ssrn.2773555

Alaa Abi Morshed (Contact Author)

Lancaster University ( email )

Lancaster LA1 4YX
United Kingdom

Elena Andreou

University of Cyprus - Department of Economics ( email )

75 Kallipoleos Street
P.O. Box 20537
1678 Nicosia
Cyprus
+357 2 892449 (Phone)
+357 2 892432 (Fax)

Otilia Boldea

Tilburg University, CentER ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

HOME PAGE: http://www.tilburguniversity.edu/webwijs/show/?uid=o.boldea

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