Computation and analysis of multiple structural change models

TLDR

Bai and Perron (1998) examined theoretical properties of estimators and test statistics in linear models with multiple structural changes. This paper addresses practical issues in empirical applications of multiple structural change procedures, including estimation of break dates, construction of confidence intervals, testing for changes, and determining the number of breaks. The authors develop a dynamic‑programming algorithm that efficiently estimates break dates and constructs confidence intervals, tests for changes, and selects the number of breaks, applicable to pure and partial structural change models and implemented in GAUSS. Empirical examples demonstrate the usefulness of the proposed procedures. © 2002 John Wiley & Sons, Ltd.

Abstract

Abstract In a recent paper, Bai and Perron ( 1998 ) considered theoretical issues related to the limiting distribution of estimators and test statistics in the linear model with multiple structural changes. In this companion paper, we consider practical issues for the empirical applications of the procedures. We first address the problem of estimation of the break dates and present an efficient algorithm to obtain global minimizers of the sum of squared residuals. This algorithm is based on the principle of dynamic programming and requires at most least‐squares operations of order O ( T 2 ) for any number of breaks. Our method can be applied to both pure and partial structural change models. Second, we consider the problem of forming confidence intervals for the break dates under various hypotheses about the structure of the data and the errors across segments. Third, we address the issue of testing for structural changes under very general conditions on the data and the errors. Fourth, we address the issue of estimating the number of breaks. Finally, a few empirical applications are presented to illustrate the usefulness of the procedures. All methods discussed are implemented in a GAUSS program. Copyright © 2002 John Wiley & Sons, Ltd.