Testing Parameter Constancy in Stationary Vector Autoregressive Models Against Continuous Change

Abstract

In this article we derive a parameter constancy test of a stationary vector autoregressive model against the hypothesis that the parameters of the model change smoothly over time. A single structural break is contained in this alternative hypothesis as a special case. The test is a generalization of a single-equation test of a similar hypothesis proposed in the literature. An advantage here is that the asymptotic distribution theory is standard. The performance of the tests is compared to that of generalized Chow-tests and found satisfactory in terms of both size and power.

Keywords:

• Econometric modelling
• Misspecification test
• Parameter stability
• Smooth transition
• Structural break

Keywords:

• JEL
• C32
• C12

Notes

¹In this case, the boostrap method can be justified with asymptotic arguments since the statistics considered are smooth functions of sample moments, and they are also asymptotically pivotal (see Horowitz, 2001).