30
20 • We need to test if a structural break has
10
occurred in 1997, usually the break is not
0
1985 1990 1995 2000 2005 2010
as obvious as this.
date • We will use the Chow test, which is a
variation of the F-test for a restriction
SP Linear (SP)
1
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st 0 1 yt ut F
0.56 (0.23 0.17) / 2
0.08
12
0.23 0.17/ 64 2*2 0.00667
2
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• Cumulative Sum – Monitors for structural • Problem with the Chow test is that we need to have enough data to do the
change. When summing a errors, when it regression on both sub-samples, i.e. T1>>k, T2>>k.
• An alternative formulation is the predictive failure test.
hits a critical value then …break. • What we do with the predictive failure test is estimate the regression over a “long”
sub-period (i.e. most of the data) and then we predict values for the other period
40 • Vie Stability Diagnostics and compare the two.
30
0
• CUSUM - Run the regression for the whole period (the restricted regression) and obtain the RSS
- Run the regression for the “large” sub-period and obtain the RSS (called RSS1). Note
-10
we call the number of observations T1 (even though it may come second).
-20
RSS RSS1 T1 k
-30
Test Statistic
RSS1 T2
-40
04 05 06 07 08 09 10 11 12 13 14 15 16
where T2 = number of observations we are attempting to “predict”. The test statistic
CUSUM 5% Significance
will follow an F(T2, T1-k).
‘Introductory Econometrics for Finance’ © Chris Brooks 2008
Backwards versus Forwards Predictive Failure Tests Predictive Failure Tests – An Example
• There are 2 types of predictive failure tests: • We have the following models estimated:
For the CAPM on Glaxo.
- Forward predictive failure tests, where we keep the last few • 1980M1-1991M12
observations back for forecast testing, e.g. we have observations for 0.39 + 1.37RMt T = 144 RSS = 0.0434
1970Q1-1994Q4. So estimate the model over 1970Q1-1993Q4 and • 1980M1-1989M12
forecast 1994Q1-1994Q4. 0.32 + 1.31RMt T1 = 120 RSS1 = 0.0420
Can this regression adequately “forecast” the values for the last two years?
- Backward predictive failure tests, where we attempt to “back-cast” 0.0434 0.0420 120 2
the first few observations, e.g. if we have data for 1970Q1-1994Q4, TestStatistic = 0.164
0.0420 24
and we estimate the model over 1971Q1-1994Q4 and backcast
1970Q1-1970Q4. • Compare with F(24,118) = 1.66.
So we do not reject the null hypothesis that the model can adequately
predict the last few observations.
‘Introductory Econometrics for Finance’ © Chris Brooks 2008 ‘Introductory Econometrics for Finance’ © Chris Brooks 2008
800
600
• They can be used to determine the importance
400
of policy actions on models and are often used
200 to account for qualitative effects.
0
• Their coefficients and t-statistics can then be
105
131
157
183
209
235
261
287
313
339
365
391
417
443
1
27
53
79
3
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• The first four lines summarize the results for different approaches to determining
the number of breaks. The “Sequential” result is obtained by performing tests from
Multi-breaks 1 to the maximum number until we cannot reject the null; the “Significant” result
chooses the largest statistically significant breakpoint. In both cases, the multiple
breakpoint test indicates that there are 5 breaks. The UDmax and WDmax results
show the number of breakpoints as determined by application of the unweighted
and weighted maximized statistics. The maximized statistics both indicate the
presence of a single break.
• The remaining lines show the individual test statistics (original, scaled, weighted)
EViews displays the F-statistic, along with the F-statistic scaled by the along with the critical values for the scaled statistics. In each case, the statistics
number of varying regressors (which is the same in this case, since we only far exceed the critical value so that we reject the null of no breaks. Note that the
have the single, varying regressor), and the Bai-Perron critical value for the values corresponding to the UDmax and WDmax statistics are shaded for easy
scaled statistic. The sequential test results indicate that there are three identification.
breakpoints: we reject the nulls of 0, 1, and 2 breakpoints in favor of the • The last two lines of output show the test results for double maximum statistics. In
alternatives of 1, 2, and 3 breakpoints, but the test of 4 versus 3 breakpoints both cases, the maximized value clearly exceeds the critical value, so that we
does not reject the null. The bottom portion of the output shows the reject the null of no breaks in favor of the alternative of a single break.
estimated breakdates:
EViews displays both the breakdates obtained from the original sequential
procedure, and those obtained following the repartition procedure. In this
case, the dates do not change. Again bear in mind that the results follow the
EViews convention in defining breakdates to be the first date of the
subsequent regime.