Computationally Attractive Stability Tests for the Efficient Method of Moments

Estimation using simulation techniques may be very time consuming. Specification tests for structural stability often require more than one of such computationally demanding estimators. Typically one for the sample, one for the post-sample and one for the combination of sample and post-sample is required. This paper describes structural stability tests for use with the Efficient Method of Moments technique. Computationally attractive post-sample estimators and test-statistics for structural stability are proposed. These computationally attractive test-statistics are modifications of the Lagrange Multiplier, Likelihood Ratio and Wald tests for structural stability and of the Hansen-type test statistics for structural stability. The modification ensures the same asymptotic optimality properties against certain local alternatives as those based on efficient computationally intensive estimators for the post-sample. However no time consuming estimators are needed for the post-sample and for the combination of sample and post- sample. Evaluation of these tests has been performed in the context of a stochastic volatility model for the S&P500.