On IVX-based structural break tests in univariate predictive regressions

Yijie Fei

Applied Economics Letters, 2024, vol. 31, issue 16, 1535-1545

Abstract: Testing for structural break in predictive regressions is important for empirical finance. In this article, we contribute to the literature by exploring asymptotic and finite-sample properties of three tests built upon IVX estimator proposed by Kostakis, Magdalinos and Stamatogiannis. Although they are shown to be non-pivotal, simulation studies suggest that limit distributions are highly insensitive to the variation of nuisance parameters. Furthermore, satisfactory small-sample size control and power performance can be achieved by applying critical values already tabulated in the literature. These tests are therefore easy to implement for practitioners and can serve as handy complements to other more sophisticated approaches. An empirical application concerning the break in the predictability of US stock returns is provided as an illustration.

Date: 2024
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DOI: 10.1080/13504851.2023.2203445

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