The Chow Test Is Based On Two Assumptions You

Question

The Chow test is based on two assumptions. You suspect that the assumption that the error variance is the same for the 2 periods, does not hold. The result being that the Chow test is not appropriate…

The Chow test is based on two assumptions. You suspect that the
assumption that the error variance is the same for the 2 periods,
does not hold. The result being that the Chow test is not
appropriate to test for structural breaks in our data. Test if the
assumption of equal error variance holds. (What is expected of
me?)

Solutions

Expert Solution

The Chow test tells us whether the
regression coefficients are different for split data sets.
Basically, it tests whether one regression line or two separate
regression lines best fit a split set of data.

There are two assumptions of Chow
test:

1. Error variance is the same for
the 2 periods

2. There exists a structural change
in the data.

The question says that there do not
exist a structural change in the data and you have to test whether
the error variance is the same for 2 periods.


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