Asymptotic inferences for an AR(1) model with a change point: stationary and nearly non-stationary cases

TL;DR

This paper investigates the asymptotic behavior of estimators in AR(1) models with a potential change point near the unit root, covering stationary and nearly non-stationary cases, with theoretical derivations and simulations.

Contribution

It provides new asymptotic distributions for estimators in AR(1) models with a near-unit root change point, extending existing theory to nearly non-stationary regimes.

Findings

Derived limiting distributions for estimators under different regimes.

Showed estimators' finite sample properties via Monte Carlo simulations.

Supported theoretical results with simulation evidence.

Abstract

This paper examines the asymptotic inference for AR(1) models with a possible structural break in the AR parameter $\beta $ near the unity at an unknown time $k_{0}$. Consider the model $y_{t}=\beta_{1}y_{t-1}I\{t\leq k_{0}\}+\beta _{2}y_{t-1}I\{t>k_{0}\}+\varepsilon_{t},~t=1,2,\cdots ,T,$ where $I\{\cdot \}$ denotes the indicator function. We examine two cases: Case (I) $|\beta_{1}|<1,\beta_{2}=\beta_{2T}=1-c/T$; and case (II)~$\beta_{1}=\beta_{1T}=1-c/T,|\beta _{2}|<1$, where $c$\ is a fixed constant, and $\{\varepsilon_{t},t\geq 1\}$\ is a sequence of i.i.d. random variables which are in the domain of attraction of the normal law with zero means and possibly infinite variances. We derive the limiting distributions of the least squares estimators of $\beta_{1}$ and $\beta_{2} $, and that of the break-point estimator for shrinking break for the aforementioned cases. Monte Carlo simulations are conducted to demonstrate the finite sample properties of the estimators. Our theoretical results are supported by Monte Carlo simulations.\newline