Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 507: Testing parameter constancy in stationary vector autoregressive models against continuous change

Changli He (), Timo Teräsvirta () and Andres González ()
Additional contact information
Changli He: Dept. of Economic Statistics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, SE-113 83 Stockholm, Sweden
Timo Teräsvirta: Dept. of Economic Statistics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, SE-113 83 Stockholm, Sweden
Andres González: Dept. of Economic Statistics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, SE-113 83 Stockholm, Sweden

Abstract: In this paper 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

JEL-codes: C32; C52

24 pages, First version: August 30, 2002. Revised: July 11, 2005. Earlier revisions: May 6, 2004, April 6, 2004, July 11, 2005.

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