- Research Article
1
- 10.1007/s00181-017-1373-8
Testing for the omission of relevant variables and regime-switching misspecification
- Dec 29, 2017
- Empirical Economics
- Andrea Beccarini
This article shows that the interpretation of statistical evidence of regime-switching is not unambiguous. The usual interpretation is that some parameters switch according to the values of a predefined latent variable. An alternative interpretation is that regime-switching, as a statistical evidence, is also possible when the linear model is underspecified and the omitted variable bias emerges. A formal test is proposed to verify a potentially spurious regression with regime-switching. Through this test, it is evident that regime-switching estimates presented in an academic paper, should be interpreted as a consequence of the misspecification considered here.
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