Post-Sample Prediction Tests for the Efficient Method of Moments

In this paper a post-sample prediction test is derived for estimators based on the Efficient Method of Moments. The main advantage of this particular test over other stability tests is that no time-consuming estimation of the structural parameters for the post-sample is needed. The asymptotic properties of the test and local power properties against certain alternatives are deduced. Using the Efficient Method of Moments methodology, an application is made to stochastic volatility models for the British pound versus Canadian dollar exchange rates. The breakpoint for the stability test is a priori set at September 16th 1992, when Britain was forced to leave the European Monetary Union Exchange Rate System.