The Information Content of Implied Probabilities to Detect Structural Change

Abstract

This paper proposes to use implied probabilities resulting from estimation methods based on unconditional moment conditions to detect structural change. The class of GEL estimators (Smith 1997) assigns a set of probabilities to each observation such that moment conditions are satisfied. These restricted probabilities are called implied probabilities. Implied probabilities may also constructed for the standard GMM (Back and Brown 1993). The proposed structural change statistic tests are based on the information content in these implied probabilities. We consider cases of structural change which can occur in the parameters of interest or in the overidentifying restrictions used to estimate these parameters.