Testing for parameter instability and structural change in persistent predictive regressions

Torben Andersen and Rasmus T. Varneskov

Journal of Econometrics, 2022, vol. 231, issue 2, 361-386

Abstract: This paper develops parameter instability and structural change tests within predictive regressions for economic systems governed by persistent vector autoregressive dynamics. Specifically, in a setting where all – or a subset – of the variables may be fractionally integrated and the predictive relation may feature cointegration, we provide sup-Wald break tests that are constructed using the Local speCtruM (LCM) approach. The new tests cover both parameter variation and multiple structural changes with unknown break dates, and the number of breaks being known or unknown. We establish asymptotic limit theory for the tests, showing that it coincides with standard testing procedures. As a consequence, existing critical values for tied-down Bessel processes may be applied, without modification. We implement the new structural change tests to explore the stability of the fractionally cointegrating relation between implied- and realized volatility (IV and RV). Moreover, we assess the relative efficiency of IV forecasts against a challenging time-series benchmark constructed from high-frequency data. Unlike existing studies, we find evidence that the IV–RV cointegrating relation is unstable, and that carefully constructed time-series forecasts are more efficient than IV in capturing low-frequency movements in RV.

Keywords: Cointegration; Fractional integration; Frequency domain inference; Local spectrum procedure; Parameter instability; Structural change; Volatility forecasting (search for similar items in EconPapers)
JEL-codes: C12 C13 C14 C32 G17 (search for similar items in EconPapers)
Date: 2022
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304407621002529
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Testing for Parameter Instability and Structural Change in Persistent Predictive Regressions (2021)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:231:y:2022:i:2:p:361-386

DOI: 10.1016/j.jeconom.2021.05.011

Access Statistics for this article

Journal of Econometrics is currently edited by T. Amemiya, A. R. Gallant, J. F. Geweke, C. Hsiao and P. M. Robinson

More articles in Journal of Econometrics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().