TESTING FOR STRUCTURAL CHANGE BY ISOTONIC REGRESSION

Detecting structural changes in economic relationships has been a longstanding challenge in econometrics. Most of the literature on structural breaks has considered abrupt structural breaks. Existing tests for detecting smooth structural change typically rely on kernel estimation. In this article, we introduce a novel tuning-parameter-free test that minimizes a criterion function over all possible nondecreasing or nonincreasing structural change functions. This test is pivotal (after appropriate scaling) in the scalar case and remains computationally simple even in multivariate settings. Compared to existing nonparametric tests, our method offers superior power against local monotonic structural changes and does not involve the choice of a bandwidth parameter. A simulation study and two empirical examples highlight the merits of the proposed test relative to some popular tests for structural changes in the literature.