Evaluation of Test Statistics for Detection of Outliers and Shifts
In: Journal of quantitative methods: JQM, Volume 4, Issue 2, p. 54-75
Abstract
Existence of outliers and structural breaks having mutually unknown nature, in time series data, offer challenges to data analysts in model identification, estimation and validation. Detection of these outliers has been an important area of research in time series since long. To analyze the impact of these structural breaks and outliers on model identification, estimation and their inferential analysis, we use two data generating processes: MA(1) and ARMA(1,1). The performance of the test statistics for detecting additive outlier(AO), innovative outlier(IO), level shift(LS) and transient change(TC) is investigated using simulation strategy through power of a test, empirical level of significance, empirical critical values, misspecification frequencies and sampling distribution of estimators for the two models. The empirical critical values are found higher than the theoretical cut-off points, empirical power of the test statistics is not satisfactory for small sample size, large cut-off points and large model coefficient. We have explored confusion between LS, AO, TC and IO at different critical values(c) by varying sample size. We have also collected empirical evidence from time series data for Pakistan using 3-stage iterative procedure to detect multiple outliers and structural breaks. We find that neglecting shocks lead to wrong identification, biased estimation and excess kurtosis.
JEL Classification Codes: C15, C18, C63, C32, C87, C51, C52, C82
AMS Classification Codes: 62, 65, 91, DI, 62-08, 62J20, 00A72, 91-08, 91-10, 91-11 62P20, 91B82, 91B84, 62M07, 62M09, 62M10, 62M15, 62M20
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