Scandinavian Working Papers in Economics

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

No 648: Determining the number of breaks in a piecewise linear regression model

Birgit Strikholm ()
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Birgit Strikholm: 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 propose a sequential method for determining the number of breaks in piecewise linear structural break models. An advantage of the method is that it is based on standard statistical inference. Tests available for testing linearity against switching regression type nonlinearity are applied sequentially to determine the number of regimes in the structural break model. A simulation study is performed in order to investigate the finite-sample behaviour of the procedure and to compare it with other alternatives. We find that our method works well in comparison for both single and multiple break cases.

Keywords: Model specification; multiple structural breaks.

JEL-codes: C22; C51

30 pages, December 13, 2006

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