Stochastic Permanent Breaks

Stochastic Permanent Breaks. Engle, R. F & Smith, A. Review of Economics and Statistics, 81(4):553–574, MIT Press, 1999.

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This paper bridges the gap between processes where shocks are permanent and those with transitory shocks by formulating a process in which the long-run impact of each innovation is time-varying and stochastic. In the stochastic permanent breaks (STOPBREAK) process, frequent transitory shocks are supplemented by occasional permanent shifts. Consistency and asymptotic normality of quasi-maximum-likelihood estimates is established, and locally best hypothesis tests of the null of a random walk are developed. The model is applied to relative prices of pairs of stocks and significant test statistics result.

@article{engle1999stochastic,
  title={Stochastic Permanent Breaks},
  author={Engle, Robert F and Smith, Aaron},
  journal={Review of Economics and Statistics},
  volume={81},
  number={4},
  pages={553--574},
  year={1999},
	keywords={econometrics},
	url={https://files.asmith.ucdavis.edu/1999_REStat_ES_stopbreak.pdf},
	abstract={This paper bridges the gap between processes where shocks are permanent and those with transitory shocks by formulating a process in which the long-run impact of each innovation is time-varying and stochastic. In the stochastic permanent breaks (STOPBREAK) process, frequent transitory shocks are supplemented by occasional permanent shifts. Consistency and asymptotic normality of quasi-maximum-likelihood estimates is established, and locally best hypothesis tests of the null of a random walk are developed. The model is applied to relative prices of pairs of stocks and significant test statistics result.},
  publisher={MIT Press}
}

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