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Structural Breaks in the Cointegrated Vector Autoregressive Model

Abstract

We generalize the cointegrated vector autoregressive model of Johansen (1988, 1991) to allow for structural breaks. We derive the likelihood ratio test for structural breaks occurring at fixed points in time, and show that it is asymptotically chi-squared. Moreover, we show how inference can be made when the null hypothesis is presence of structural breaks. The estimation technique derived for this purpose can be applied to several other generalizations of the standard model, beyond the structural breaks treated here. For example, the new technique can be applied to estimate models with heteroskedasticity. We apply our generalized model to US term structure data, accounting for structural breaks that coincide with the changes in the Fed's policy in September 1979 and October 1982. Contrary to previous findings we cannot reject the long-run implications of the expectations hypothesis.

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