Testing for the omission of relevant variables and regime-switching misspecification
Andrea Beccarini ()
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Andrea Beccarini: University of Muenster
Empirical Economics, 2019, vol. 56, issue 3, No 1, 775-796
Abstract This article shows that the interpretation of statistical evidence of regime-switching is not unambiguous. The usual interpretation is that some parameters switch according to the values of a predefined latent variable. An alternative interpretation is that regime-switching, as a statistical evidence, is also possible when the linear model is underspecified and the omitted variable bias emerges. A formal test is proposed to verify a potentially spurious regression with regime-switching. Through this test, it is evident that regime-switching estimates presented in an academic paper, should be interpreted as a consequence of the misspecification considered here.
Keywords: Regime-switching estimator; Omitted variable bias; Quadratic form; Misspecification (search for similar items in EconPapers)
JEL-codes: C12 C34 C52 (search for similar items in EconPapers)
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