Scandinavian Working Papers in Economics

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

No 579: Testing Parameter Constancy in Unit Root Autoregressive Models Against Continuous Change

Changli He () and Rickard Sandberg ()
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
Rickard Sandberg: 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 tests for parameter constancy when the data generating process is non-stationary against the hypothesis that the parameters of the model change smoothly over time. To obtain the asymptotic distributions of the tests we generalize many theoretical results, as well as new are introduced, in the area of unit roots. The results are derived under the assumption that the error term is a strong mixing. Small sample properties of the tests are investigated, and in particular, the power performances are satisfactory.

Keywords: Parameter constancy; LSTAR; Unit root; Brownian; motion; Strong mixing

JEL-codes: C12; C22; C52

26 pages, First version: January 21, 2005. Revised: February 8, 2005.

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