Testing for Parameter Instability across Different Modeling Frameworks

Francesco Calvori, Drew Creal, Siem Jan Koopman and Andre Lucas

Journal of Financial Econometrics, 2017, vol. 15, issue 2, 223-246

Abstract: We develop a new parameter instability test that generalizes the seminal ARCH-Lagrange Multiplier test of Engle (1982) for a constant variance against the alternative of autoregressive conditional heteroskedasticity to settings with nonlinear time-varying parameters and non-Gaussian distributions. We investigate the performance of the new test relative to both classic and recently proposed parameter instability tests, including tests against structural breaks and parameter-driven dynamics. We find that the recent test of Müller and Petalas (2010) performs best across a wide range of alternatives, particularly if parameter instability is slow. For time-varying parameters that exhibit more mean reversion, our new test has higher power. We provide an application to a heavily unbalanced panel of losses given default for US corporations from 1982 to 2010 and provide evidence of significant parameter instability in the parameters of a static beta distributed model.

Keywords: credit risk; generalized autoregressive score model; observation-driven and parameter-driven models; regime switching; structural breaks; time-varying parameters (search for similar items in EconPapers)
JEL-codes: C12 C22 C52 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
http://hdl.handle.net/10.1093/jjfinec/nbw008 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oup:jfinec:v:15:y:2017:i:2:p:223-246.

Ordering information: This journal article can be ordered from
https://academic.oup.com/journals

Access Statistics for this article

Journal of Financial Econometrics is currently edited by Allan Timmermann and Fabio Trojani

More articles in Journal of Financial Econometrics from Oxford University Press Oxford University Press, Great Clarendon Street, Oxford OX2 6DP, UK. Contact information at EDIRC.
Bibliographic data for series maintained by Oxford University Press ().