Econometrica: Sep, 1996, Volume 64, Issue 5
Monitoring Structural Change
Chia-Shang James Chu, Halbert White, Maxwell Stinchcombe
Contemporary tests for structural change deal with detections of the "one-shot" type: given an historical data set of fixed size, these tests are designed to detect a structural break within the data set. Due to the law of the iterated logarithm, one-shot tests cannot be applied to monitor out-of-sample stability each time new data arrive without signalling a nonexistent break with probability one. We propose and analyze two real-time monitoring procedures with controlled size asymptotically: the fluctuation and CUSUM monitoring procedures. We extend an invariance principle in the sequential testing literature to obtain our results. Simulation results show that the proposed monitoring procedures indeed have controlled asymptotic size. Detection timing depends on the magnitude of parameter change, the signal to noise ratio, and the location of the out-of-sample break point.