The Effect of Serial Correlation on Tests for Parameter Change at Unknown Time

Abstract

It is shown that serial correlation can produce striking effects in distributions of change-point statistics. Failure to account for these effects is shown to invalidate change-point tests, either through increases in the type 1 error rates if low frequency spectral mass predominates in the spectrum of the noise process, or through diminution of the power of the tests when high frequency mass predominates. These effects are char- acterized by the expression {2i- f(O)/fJr, f(A) dA), where f( ) is the spec- tral density of the noise process; in sample survey work this is known as the design effect or "deff." Simple precise adjustments to change-point test statistics which account for serial correlation are provided. The same adjustment applies to all commonly used regression models. Residual pro- cesses are derived for both stationary time series satisfying a moment condition and for general linear regression models with stationary error structure. 1.