Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2014-01-14
Number: 14-010/IV/DSF71
Author-Name: Francesco Calvori
Author-Workplace-Name: Department of Statistics 'G. Parenti', University of Florence, Italy
Author-Name: Drew Creal
Author-Workplace-Name: Booth School of Business, University of Chicago
Author-Name: Siem Jan Koopman
Author-Workplace-Name: VU University Amsterdam
Author-Name: Andre Lucas
Author-Workplace-Name: VU University Amsterdam
Title: Testing for Parameter Instability in Competing Modeling Frameworks
Abstract: We develop a new parameter stability test against the alternative of observation driven generalized autoregressive score dynamics. The new test generalizes the ARCH-LM test of Engle (1982) to settings beyond time-varying volatility and exploits any autocorrelation in the likelihood scores under the alternative. We compare the test's performance with that of alternative tests developed for competing time-varying parameter frameworks, such as structural breaks and observation driven parameter dynamics. The new test has higher and more stable power against alternatives with frequent regime switches or with non-local parameter driven time-variation. For parameter driven time variation close to the null or for infrequent structural changes, the test of Muller and Petalas (2010)
performs best overall. We apply all tests empirically to a panel of losses given default over the period 1982--2010 and find significant evidence of parameter variation in the 
underlying beta distribution.
Classification-JEL: C12, C52, C22
Keywords: time-varying parameters; observation driven models; parameter driven models; structural breaks; generalized autoregressive score model; regime switching; credit risk
File-Url: https://papers.tinbergen.nl/14010.pdf
File-Format: application/pdf
File-Size: 427395 bytes
Handle: RePEc:tin:wpaper:20140010