Structural break
In econometrics and statistics, a structural break is an
unexpected change over time in the parameters of regression
models, which can lead to huge forecasting errors and
unreliability of the model in general.[1][2][3] This issue was
popularised by David Hendry, who argued that lack of
stability of coefficients frequently caused forecast failure, and
therefore we must routinely test for structural stability.
Structural stability − i.e., the time-invariance of regression
coefficients − is a central issue in all applications of linear
regression models.[4]
Linear regression with a structural break
Structural break tests
A single break in mean with a known breakpoint
For linear regression models, the Chow test is often used to test for a single break in mean at a known time
period K for K ∈ [1,T].[5][6] This test assesses whether the coefficients in a regression model are the
same for periods [1,2, ...,K] and [K + 1, ...,T].[6]
Other forms of structural breaks
Other challenges occur where there are:
Case 1: a known number of breaks in mean with unknown break points;
Case 2: an unknown number of breaks in mean with unknown break points;
Case 3: breaks in variance.
The Chow test is not applicable in these situations, since it only applies to models with a known breakpoint
and where the error variance remains constant before and after the break.[7][5][6] Bayesian methods exist to
address these difficult cases via Markov chain Monte Carlo inference.[8][9]
In general, the CUSUM (cumulative sum) and CUSUM-sq (CUSUM squared) tests can be used to test the
constancy of the coefficients in a model. The bounds test can also be used.[6][10] For cases 1 and 2, the
sup-Wald (i.e., the supremum of a set of Wald statistics), sup-LM (i.e., the supremum of a set of Lagrange
multiplier statistics), and sup-LR (i.e., the supremum of a set of likelihood ratio statistics) tests developed
by Andrews (1993, 2003) may be used to test for parameter instability when the number and location of
structural breaks are unknown.[11][12] These tests were shown to be superior to the CUSUM test in terms
of statistical power,[11] and are the most commonly used tests for the detection of structural change
involving an unknown number of breaks in mean with unknown break points.[4] The sup-Wald, sup-LM,
and sup-LR tests are asymptotic in general (i.e., the asymptotic critical values for these tests are applicable
for sample size n as n → ∞ ),[11] and involve the assumption of homoskedasticity across break points for
finite samples;[4] however, an exact test with the sup-Wald statistic may be obtained for a linear regression
model with a fixed number of regressors and independent and identically distributed (IID) normal
errors.[11] A method developed by Bai and Perron (2003) also allows for the detection of multiple structural
breaks from data.[13]
The MZ test developed by Maasoumi, Zaman, and Ahmed (2010) allows for the simultaneous detection of
one or more breaks in both mean and variance at a known break point.[4][14] The sup-MZ test developed
by Ahmed, Haider, and Zaman (2016) is a generalization of the MZ test which allows for the detection of
breaks in mean and variance at an unknown break point.[4]
Structural breaks in cointegration models
For a cointegration model, the Gregory–Hansen test (1996) can be used for one unknown structural
break,[15] the Hatemi–J test (2006) can be used for two unknown breaks[16] and the Maki (2012) test
allows for multiple structural breaks.
Statistical packages
There are several statistical packages that can be used to find structural breaks, including R,[17] GAUSS,
and Stata, among others.
See also
Structural change
Change detection
Great Moderation
References
1. Antoch, Jaromír; Hanousek, Jan; Horváth, Lajos; Hušková, Marie; Wang, Shixuan (25 April
2018). "Structural breaks in panel data: Large number of panels and short length time
series" ([Link] (PDF). Econometric
Reviews. 38 (7): 828–855. doi:10.1080/07474938.2018.1454378 ([Link]
F07474938.2018.1454378). S2CID 150379490 ([Link]
50379490). "Structural changes and model stability in panel data are of general concern in
empirical economics and finance research. Model parameters are assumed to be stable
over time if there is no reason to believe otherwise. It is well-known that various economic
and political events can cause structural breaks in financial data. ... In both the statistics and
econometrics literature we can find very many of papers related to the detection of changes
and structural breaks."
2. Kruiniger, Hugo (December 2008). "Not So Fixed Effects: Correlated Structural Breaks in
Panel Data" ([Link]
(PDF). IZA Institute of Labor Economics. pp. 1–33. Retrieved 20 February 2019.
3. Hansen, Bruce E (November 2001). "The New Econometrics of Structural Change: Dating
Breaks in U.S. Labor Productivity" ([Link] Journal of
Economic Perspectives. 15 (4): 117–128. doi:10.1257/jep.15.4.117 ([Link]
2Fjep.15.4.117).
4. Ahmed, Mumtaz; Haider, Gulfam; Zaman, Asad (October 2016). "Detecting structural change
with heteroskedasticity". Communications in Statistics – Theory and Methods. 46 (21):
10446–10455. doi:10.1080/03610926.2016.1235200 ([Link]
2016.1235200). S2CID 126189844 ([Link]
"The hypothesis of structural stability that the regression coefficients do not change over
time is central to all applications of linear regression models."
5. Hansen, Bruce E (November 2001). "The New Econometrics of Structural Change: Dating
Breaks in U.S. Labor Productivity" ([Link] Journal of
Economic Perspectives. 15 (4): 117–128. doi:10.1257/jep.15.4.117 ([Link]
2Fjep.15.4.117).
6. Greene, William (2012). "Section 6.4: Modeling and testing for a structural break".
Econometric Analysis (7th ed.). Pearson Education. pp. 208–211. ISBN 9780273753568.
"An important assumption made in using the Chow test is that the disturbance variance is
the same in both (or all) regressions. ...
6.4.4 TESTS OF STRUCTURAL BREAK WITH UNEQUAL VARIANCES ...
In a small or moderately sized sample, the Wald test has the unfortunate property that the
probability of a type I error is persistently larger than the critical level we use to carry it out.
(That is, we shall too frequently reject the null hypothesis that the parameters are the same
in the subsamples.) We should be using a larger critical value. Ohtani and Kobayashi (1986)
have devised a "bounds" test that gives a partial remedy for the problem.15"
7. Gujarati, Damodar (2007). Basic Econometrics. New Delhi: Tata McGraw-Hill. pp. 278–284.
ISBN 978-0-07-066005-2.
8. Erdman, Chandra; Emerson, John W. (2007). "bcp: An R Package for Performing a Bayesian
Analysis of Change Point Problems". Journal of Statistical Software. 23 (3): 1-1.
doi:10.18637/jss.v023.i03 ([Link] S2CID 61014871 (http
s://[Link]/CorpusID:61014871).
9. Li, Yang; Zhao, Kaiguang; Hu, Tongxi; Zhang, Xuesong. "BEAST: A Bayesian Ensemble
Algorithm for Change-Point Detection and Time Series Decomposition" ([Link]
haokg/Rbeast). GitHub.
10. Pesaran, M. H.; Shin, Y.; Smith, R. J. (2001). "Bounds testing approaches to the analysis of
level relationships". Journal of Applied Econometrics. 16 (3): 289–326. doi:10.1002/jae.616
([Link] hdl:10983/25617 ([Link]
17). S2CID 120051935 ([Link]
11. Andrews, Donald (July 1993). "Tests for Parameter Instability and Structural Change with
Unknown Change Point" ([Link]
(PDF). Econometrica. 61 (4): 821–856. doi:10.2307/2951764 ([Link]
51764). JSTOR 2951764 ([Link] Archived ([Link]
[Link]/web/20171106014407/[Link]
(PDF) from the original on 6 November 2017.
12. Andrews, Donald (January 2003). "Tests for Parameter Instability and Structural Change
with Unknown Change Point: A Corrigendum" ([Link]
5/[Link]
(PDF). Econometrica. 71 (1): 395–397. doi:10.1111/1468-0262.00405 ([Link]
1%2F1468-0262.00405). S2CID 55464774 ([Link]
774). Archived from the original ([Link]
[Link]) (PDF) on 6 November 2017.
13. Bai, Jushan; Perron, Pierre (January 2003). "Computation and analysis of multiple structural
change models". Journal of Applied Econometrics. 18 (1): 1–22. doi:10.1002/jae.659 (https://
[Link]/10.1002%2Fjae.659). hdl:10.1002/jae.659 ([Link]
9).
14. Maasoumi, Esfandiar; Zaman, Asad; Ahmed, Mumtaz (November 2010). "Tests for structural
change, aggregation, and homogeneity". Economic Modelling. 27 (6): 1382–1391.
doi:10.1016/[Link].2010.07.009 ([Link]
15. Gregory, Allan; Hansen, Bruce (1996). "Tests for Cointegration in Models with Regime and
Trend Shifts". Oxford Bulletin of Economics and Statistics. 58 (3): 555–560.
doi:10.1111/j.1468-0084.1996.mp58003008.x ([Link]
mp58003008.x).
16. Hacker, R. Scott; Hatemi-J, Abdulnasser (2006). "Tests for Causality between Integrated
Variables Using Asymptotic and Bootstrap Distributions: Theory and Application". Applied
Economics. 38 (15): 1489–1500. doi:10.1080/00036840500405763 ([Link]
0%2F00036840500405763). S2CID 121999615 ([Link]
21999615).
17. Kleiber, Christian; Zeileis, Achim (2008). Applied Econometrics with R ([Link]
com/books?id=86rWI7WzFScC&pg=PA169). New York: Springer. pp. 169–176. ISBN 978-
0-387-77316-2.
Retrieved from "[Link]
