Chow Test Lab Report

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Chow Test Chow test, which is proposed by Gregory Chow in 1960, is to estimate the equations separately for each subsample and to test whether the coefficients of two linear regression models are equal. If a significant difference was found in coefficients of that two models, it illustrates a structural change in the relationship. Structural change is a deviation or shift in a time series, which it may eventually lead to large forecasting errors and unreliability of the model. The breakpoint for Chow test in this studies is set as January 2004, as the number of tourist arrivals dropped to 10.6 million in 2003 from 13.3 million in 2002. This was a result of outbreak of the Severe Acute Respiratory Syndrome (SARS). The null hypothesis of Chow test implies that there is no structural change, such that the parameter is stable while the alternative…show more content…
Augmented Dickey-Fuller (ADF) Test Augmented Dickey-Fuller (ADF) test is formed by adding lagged terms of dependent variables to Dickey-Fuller (DF) test. ADF test is an alternative test to ensure there is no autocorrelation within the error terms in DF test. To determine the number of lags, the value that minimizes Akaike Information Criteria (AIC) is used. The ADF test equation is written as ∆y_t=γ+δt+αy_(t-1)+∑_(i=1)^p▒〖β_i y_(t-i)+u_t 〗 where t=1,2,…,n. n is sample size, p is lag length and u_t is error term. A time trend component also augmented in Equation (3.1) to allow possible presence of deterministic time trend. The hypotheses to be tested are: H_0: ∝=0 against H_1:∝<0 Test statistics of ADF test is τ, but it does not follow t-distribution under H0 because the variance of the process is not constant. The empirical distribution of τ is tabulated by MacKinnon (1996). If H_0 is not rejected, y_t contains a unit root and it is not stationary. Else, y_t is said to be integrated of order zero or I(0). Exponential

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