 On the Usefulness or Lack Thereof of Optimality Criteria for Structural Change TestsPierre Perron and Yohei Yamamoto No wp2008-006, Boston University - Department of Economics - Working Papers Series from Boston University - Department of Economics Abstract: Elliott and Müller (2006) considered the problem of testing for general types of parameter variations, including infrequent breaks. They developed a framework that yields optimal tests, in the sense that they nearly attain some local Gaussian power envelop. The main ingredient in their setup is that the variance of the process generating the changes in the parameters must go to zero at a fast rate. They recommended the so-called qLˆL test, a partial sums type test based on the residuals obtained from the restricted model. We show that for breaks that are very small, its power is indeed higher than other tests, including the popular sup-Wald test. However, the differences are very minor. When the magnitude of change is moderate to large, the power of the test is very low in the context of a regression with lagged dependent variables or when a correction is applied to account for serial correlation in the errors. In many cases, the power goes to zero as the magnitude of change increases. The power of the sup-Wald test does not show this non-monotonicity and its power is far superior to the qLˆL test when the break is not very small. We claim that the optimality of the qLˆL test does not come from the properties of the test statistics but the criterion adopted, which is not useful to analyze structural change tests. Instead, we use the concept of the relative approximate Bahadur slopes to assess the relative efficiency of two tests. When doing so, it is shown that the sup-Wald test indeed dominates the qLˆL test and, in many cases, the latter has zero relative asymptotic efficiency. Keywords: structural change; local asymptotics; Bahadur efficiency; hypothesis testing; parameter variations (search for similar items in EconPapers) There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it. Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:bos:wpaper:wp2008-006 Access Statistics for this paper More papers in Boston University - Department of Economics - Working Papers Series from Boston University - Department of Economics Contact information at EDIRC. |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.