Structural break
Encyclopedia
A structural break is a concept in econometrics
. A structural break appears when we see an unexpected shift in a (macroeconomic) time series
. This can lead to huge forecasting
errors and unreliability of the model in general. This issue was popularised by David Hendry.
(cumulative sum) and CUSUM-sq (CUSUM squared) tests can be used to test the constancy of the coefficients in a model. The bounds test introduced by Hashem Pesaran, Yongcheol Shin
, and Richard Smith
can also be used.
For a linear model with one known single break in mean, the Chow test
is often used. If the single break in mean is unknown, then the sup test may be appropriate. Other challenges are where there are:
The Chow test
is not applicable for these situations.
For nonstationary process, there are many more challenges. For a cointegration
model, the Gregory and Hansen test (1996) is used for one unknown structural break, and the Hatemi-J test (2007) is used for two unknown breaks.
There are several programs that can be used to find structural breaks, including R (open source) and Gauss.
The latest method has been used by Bai and Perron (2003) in which multiple structural breaks can be automatically detected from data. The literature in this regard is very vast starting right from 1987 to 2010. Recently economists are going for both growth rate analysis and also econometric analysis in order to find break points one such way has been recommended by Chandan Mukherjee (2009).
Econometrics
Econometrics has been defined as "the application of mathematics and statistical methods to economic data" and described as the branch of economics "that aims to give empirical content to economic relations." More precisely, it is "the quantitative analysis of actual economic phenomena based on...
. A structural break appears when we see an unexpected shift in a (macroeconomic) time series
Time series
In statistics, signal processing, econometrics and mathematical finance, a time series is a sequence of data points, measured typically at successive times spaced at uniform time intervals. Examples of time series are the daily closing value of the Dow Jones index or the annual flow volume of the...
. This can lead to huge forecasting
Forecasting
Forecasting is the process of making statements about events whose actual outcomes have not yet been observed. A commonplace example might be estimation for some variable of interest at some specified future date. Prediction is a similar, but more general term...
errors and unreliability of the model in general. This issue was popularised by David Hendry.
Test
In general, the CUSUMCUSUM
In statistical quality control, the CUSUM is a sequential analysis technique due to E. S. Page of the University of Cambridge. It is typically used for monitoring change detection...
(cumulative sum) and CUSUM-sq (CUSUM squared) tests can be used to test the constancy of the coefficients in a model. The bounds test introduced by Hashem Pesaran, Yongcheol Shin
Yongcheol Shin
Professor Yongcheol Shin is a British-Korean economist. He has held positions at leading academic institutions such as University of Cambridge, University of Edinburgh and University of Leeds...
, and Richard Smith
Richard Smith
Richard Smith may refer to:* Richard Smyth , also written Richard Smith, English Catholic scholar* Richard Smith , English Catholic Bishop, titular of Chalcedon in Asia Minor...
can also be used.
For a linear model with one known single break in mean, the Chow test
Chow test
The Chow test is a statistical and econometric test of whether the coefficients in two linear regressions on different data sets are equal. The Chow test was invented by economist Gregory Chow. In econometrics, the Chow test is most commonly used in time series analysis to test for the presence of...
is often used. If the single break in mean is unknown, then the sup test may be appropriate. Other challenges are where there are:
- a known number of unknown breaks in mean;
- an unknown number of (unknown) breaks in mean;
- breaks in variance.
The Chow test
Chow test
The Chow test is a statistical and econometric test of whether the coefficients in two linear regressions on different data sets are equal. The Chow test was invented by economist Gregory Chow. In econometrics, the Chow test is most commonly used in time series analysis to test for the presence of...
is not applicable for these situations.
For nonstationary process, there are many more challenges. For a cointegration
Cointegration
Cointegration is a statistical property of time series variables. Two or more time series are cointegrated if they share a common stochastic drift.-Introduction:...
model, the Gregory and Hansen test (1996) is used for one unknown structural break, and the Hatemi-J test (2007) is used for two unknown breaks.
There are several programs that can be used to find structural breaks, including R (open source) and Gauss.
More sophisticated model
If there are too many unknown breaks, then just assume the parameter to be time varying.The latest method has been used by Bai and Perron (2003) in which multiple structural breaks can be automatically detected from data. The literature in this regard is very vast starting right from 1987 to 2010. Recently economists are going for both growth rate analysis and also econometric analysis in order to find break points one such way has been recommended by Chandan Mukherjee (2009).