Testing parameter constancy in linear models against stochastic stationary parameters |
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Authors: | Chien-Fu Jeff Lin Timo Tersvirta |
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Institution: | a Department of Economics, National Taiwan University, Taipei 10020, Taiwan, ROC;b Department of Economic Statistics, Stockholm School of Economics, S-113 83 Stockholm, Sweden;c Bank of Norway, Research Department, N-0107 Oslo, Norway |
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Abstract: | This paper considers testing parameter constancy in a linear model when the alternative is that a subset of the parameters follows a stationary vector autoregressive process of known finite order. This kind of a linear model is only identified under the alternative, which usually precludes finding a test statistic with an analytic null distribution. In the present situation, however, it is still possible to derive a test statistic with an asymptotic chi-squared distribution under the null hypothesis and this is done in the paper. The small-sample properties of the test statistic are investigated by simulation and found statisfactory. The test retains its power when the alternative to parameter constancy is a random walk parameter process. |
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Keywords: | Lack of identification Lagrange multiplier test Parameter stability Return to normalcy Time varying parameters Vector autoregressive process |
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