Testing for Parameter Instability in Competing Modeling Frameworks

Francesco Calvori, Drew Creal, Siem Jan Koopman and Andre Lucas
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Francesco Calvori: Department of Statistics 'G. Parenti', University of Florence, Italy

Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: We develop a new parameter stability test against the alternative of observation driven generalized autoregressive score dynamics. The new test generalizes the ARCH-LM test of Engle (1982) to settings beyond time-varying volatility and exploits any autocorrelation in the likelihood scores under the alternative. We compare the test's performance with that of alternative tests developed for competing time-varying parameter frameworks, such as structural breaks and observation driven parameter dynamics. The new test has higher and more stable power against alternatives with frequent regime switches or with non-local parameter driven time-variation. For parameter driven time variation close to the null or for infrequent structural changes, the test of Muller and Petalas (2010) performs best overall. We apply all tests empirically to a panel of losses given default over the period 1982--2010 and find significant evidence of parameter variation in the underlying beta distribution.

Keywords: time-varying parameters; observation driven models; parameter driven models; structural breaks; generalized autoregressive score model; regime switching; credit risk (search for similar items in EconPapers)
JEL-codes: C12 C22 C52 (search for similar items in EconPapers)
Date: 2014-01-14
New Economics Papers: this item is included in nep-ecm and nep-ets
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Citations: View citations in EconPapers (3)

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