A cusum and cusumsq tests we may have no strong prior

Info icon This preview shows pages 15–19. Sign up to view the full content.

View Full Document Right Arrow Icon
A. CUSUM and CUSUMSQ tests We may have no strong prior knowledge of specific structural breaks. Another method used to avoid arbitrary breakpoints (structural change points) is based on recursive estimation . This involves estimating the equation by OLS; starting with a small sample and allow the data period to increase by one period each estimate. It therefore produces a time series of estimates for the coefficients. These can be plotted with confidence intervals. Under the null hypothesis of parameter stability CUSUM should have zero mean and variance approximately equal to the number of normalised residuals being summed. Reject the null hypothesis of parameter stability if the CUSUM plot cross's any of the two lines. 5 You are not responsible from this test.
Image of page 15

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
ECON 301 - Introduction to Econometrics I May 2013 METU - Department of Economics Instructor: Dr. Ozan ERUYGUR e-mail: [email protected] Lecture Notes 16 An alternative similar test is based on the cumulated sums of squared residuals, CUSUMSQ . Reject the null hypothesis of parameter stability if the CUSUMSQ plot cross's any of the two lines. It is generally recognized that the power of the tests is low (are not reliable for small samples) and in practice they are often used as a diagnostic tool. It is advisable to complement these parameter stability indicators with a formal Chow test (ACOV or Predictive). Example As an example of some of the tests discussed in this section the following price linkage equation from the cheese retail price to the wholesale price was estimated by OLS Y t 0 1 X t +u t where Y t is the cheese wholesale price and X t is the cheese retail price.
Image of page 16
ECON 301 - Introduction to Econometrics I May 2013 METU - Department of Economics Instructor: Dr. Ozan ERUYGUR e-mail: [email protected] Lecture Notes 17
Image of page 17

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
ECON 301 - Introduction to Econometrics I May 2013 METU - Department of Economics Instructor: Dr. Ozan ERUYGUR e-mail: [email protected] Lecture Notes 18
Image of page 18
ECON 301 - Introduction to Econometrics I May 2013 METU - Department of Economics Instructor: Dr. Ozan ERUYGUR e-mail: [email protected] Lecture Notes 19 The CUSUM suggests no parameter instability. The CUSUMSQ suggest parameter instability between 1980-85. Hence according to CUSUMSQ test there can be a structural change after 1980 or between 1980-1985. These two possibility can be tested by usual Chow structural change test.
Image of page 19
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern