• <Source Information> Jin Seo Cho and Halbert L. White (2007): Econometrica, 75, 1671-1720.

  • <Abstract> We analyze use of a quasi-likelihood ratio (QLR) statistic for a mixture model to test the null hypothesis of one regime versus the alternative of two regimes in a Markov regime-switching context. This test exploits mixture properties implied by the regime-switching process but ignores certain implied serial correlation properties. When formulated in the natural way, the setting is non-standard, involving nuisance parameters on the boundary of the parameter space, nuisance parameters identified only under the alternative, or approximations using derivatives higher than the second order. We exploit recent advances by Andrews (2001) and contribute to the literature by extending the scope of mixture models, obtaining asymptotic null distributions different from those in the literature. We further provide critical values for popular models or bounds for tail probabilities useful in constructing conservative critical values for regime-switching tests. We compare the size and power of our statistics to other useful tests for regime switching via Monte Carlo and find relatively good performance. We apply our methods to re-examine the classic cartel study of Porter (1983) and reaffirm Porter's findings.