Optimal break tests for large linear time series models

Abstract

We develop a class of optimal tests for a structural break occurring at an unknown date in infinite and growing-order time series regression models, such as AR($\infty$), linear regression with increasingly many covariates, and nonparametric regression. Under an auxiliary i.i.d. Gaussian error assumption, we derive an average power optimal test, establishing a growing-dimensional analog of the exponential tests of Andrews and Ploberger (1994) to handle identification failure under the null hypothesis of no break. Relaxing the i.i.d. Gaussian assumption to a more general dependence structure, we establish a functional central limit theorem for the underlying stochastic processes, which features an extra high-order serial dependence term due to the growing dimension. We robustify our test both against this term and finite sample bias and illustrate its excellent performance and practical relevance in a Monte Carlo study and a real data empirical example.