Testing for regime switching

Jin Seo Cho, Halbert White

Research output: Contribution to journalArticle

68 Citations (Scopus)

Abstract

We analyze use of a quasi-likelihood ratio statistic for a mixture model to test the null hypothesis of one regime versus the alternative of two regimes in a Markov regime-switching context. This test exploits mixture properties implied by the regime-switching process, but ignores certain implied serial correlation properties. When formulated in the natural way, the setting is nonstandard, involving nuisance parameters on the boundary of the parameter space, nuisance parameters identified only under the alternative, or approximations using derivatives higher than second order. We exploit recent advances by Andrews (2001) and contribute to the literature by extending the scope of mixture models, obtaining asymptotic null distributions different from those in the literature. We further provide critical values for popular models or bounds for tail probabilities that are useful in constructing conservative critical values for regime-switching tests. We compare the size and power of our statistics to other useful tests for regime switching via Monte Carlo methods and find relatively good performance. We apply our methods to reexamine the classic cartel study of Porter (1983) and reaffirm Porter's findings.

Original languageEnglish
Pages (from-to)1671-1720
Number of pages50
JournalEconometrica
Volume75
Issue number6
DOIs
Publication statusPublished - 2007 Nov 1

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Testing
Regime switching
Mixture model
Critical value
Nuisance parameter
Statistics
Monte Carlo method
Likelihood ratio statistic
Asymptotic distribution
Cartel
Approximation
Serial correlation
Markov regime-switching
Quasi-likelihood
Tail probability
Derivatives

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

Cite this

Cho, Jin Seo ; White, Halbert. / Testing for regime switching. In: Econometrica. 2007 ; Vol. 75, No. 6. pp. 1671-1720.
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Testing for regime switching. / Cho, Jin Seo; White, Halbert.

In: Econometrica, Vol. 75, No. 6, 01.11.2007, p. 1671-1720.

Research output: Contribution to journalArticle

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